Economy

Is the Irish economy overheating?

According to the OECD, Ireland is exhibiting ‘some signs’ of overheating

The OECD warns that another property bubble could be forming. Photograph: Eric Piermont/AFP/Getty Images

Thu May 31 2018 - 05:56

Overheating is a nebulous concept. In broad terms, it refers to an economy that is expanding at an unsustainable rate, but what environmentalist wouldn’t claim that capitalism, even the modest, socially conscious Nordic kind, isn’t destroying huge swathes of the planet?

More precisely, overheating refers to the stage of the economic cycle when demand is so strong that it eats up every bit of spare production capacity, bidding up wages and prices in the process.

So when the pool of free labour runs dry, employers can only recruit staff by enticing them with bigger wages.

So what are we to make of the OECD’s warning that the Irish economy is exhibiting “some signs” of overheating and that another property bubble could be forming?

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This when inflation is negative; credit is largely locked down by tight Central Bank lending rules; employment is still below its pre-crash peak and wages are growing by just 2 per cent.

The Paris-based organisation hangs its latest warning on what it said was a sharp rise in new mortgage loans and SME loans driven by construction-related activity and prospective of further rises in house prices.

The last time the OECD warned about the possibility of a housing bubble in Ireland was on the eve of the financial crash in 2006, a warning that was largely ignored. Back then the OECD's economists highlighted Ireland's "buoyant" housing market, noting it was being driven by strong economic growth, dynamic demographics and low-interest rates, all of which apply today.

However, in 2006 the OECD also made much of the “large tax advantages and relatively lenient credit policies by banks” while noting that property prices were overvalued, all of which don’t necessarily apply today.

And this is what makes its warning this time around hard to weigh up. Parts of the Irish economy – housing, health – seem to be in a state of permanent imbalance, but whether they will tip the entire economy into an overheating mode is not easily answered at this stage.

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