ESRI drums its ‘overheating’ message home

The ESRI’s latest warning about the possibility of the economy overheating as a result of a big increase in residential construction is nothing new.

The State’s foremost economic think tank has been banging this drum for months now.

The emphasis, however, was more pronounced in its latest bulletin, primarily because of a recent surge in housing completions.

In a segment on housing supply, the ESRI highlighted the 1,400 completions in August, one of the largest monthly increases in recent years, as an indicator of the current trend.

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This level of house building is still well below demand, estimated to be around 30,000 annually, meaning house prices and rents are likely to keep climbing.

However, a big pick-up in construction has the potential to drive down the level of unemployment in the wider economy, and push us closer to full capacity.

Even at unemployment levels of 6 per cent, considered bad in the US, the Irish economy may be at full tilt for structural reasons related to participation rates.

All of which points to overheating. Put simply this means rising wages and prices followed by an erosion of competitiveness and a potential curtailing of economic growth.

Sting

In these circumstances, the Government may be forced to take some of the sting out of the economy by ditching its spending and tax plans, even reversing back into austerity, not electorally popular or politically wise for a minority Government in current circumstances.

The National Competitiveness Council has also been warning about potential loss in competitiveness, albeit for different reasons.

Maintaining the current growth trajectory while tackling some of the economy’s infrastructural bottlenecks was always going to be a difficult task, particularly in the context of the EU’s stringent fiscal rules.

The ESRI believes the Government should fast-track a planned site tax to stop developers hoarding land, a supply-side measure which is less likely to inflate prices.

On the upside, the ESRI is still predicting a healthy level of economic growth – 4.2 per cent this year and 3.5 per cent in 2017.

The latter is more positive than Ibec’s recent prediction of 2.8 per cent for 2017 but perhaps the think tank is a more disinterested party than the employers’ group.