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The medium-term outlook for Ireland is good - but Brexit and housing bubble are looming risks

A new ESRI report looks at how the possible Brexit scenarios will affect Ireland.

Image: Shutterstock/rozbyshaka

A NEW REPORT from the ESRI on the medium-term outlook for the Irish economy says that while the outlook for the economy is generally good, threats to foreign direct investment, post-Brexit, and the problems with the supply of housing could pose big risks.

According to the think-tank, the Irish economy can sustainably grow by 3% each year until 2025.

The report warns, however, that Britain leaving the EU is likely to have a “significant negative impact” on the Irish economy.

Additionally, a gap between the amount of deposits in banks and the expected level of credit required for housing could give rise to “concerns about the emergence of another credit fuelled bubble”.

Growth

The ESRI said that the “sustainable long-term real growth rate” of the Irish economy was around 3%, despite recent warnings from watchdog body the Irish Fiscal Advisory Council that growth projections for were “far from assured”.

This predicted growth will be underpinned by the continued increase in the number of people working, which is expected to rise by 2% each year.

The demand for workers will also reduce the unemployment rate to just over 6% in the medium term, according to the ESRI.

Inflation, meanwhile, is expected to remain “relatively low” at 2% per year.

Warnings

The latest ESRI report looked at the opportunities and threats that Brexit could throw up for Ireland, especially in terms of foreign direct investment.

It said that while there was potential for Ireland to benefit from foreign direct investment relocation from the UK after Brexit, this was entirely dependent on global demand.

If the world economy continued to perform well and firms relocated their operations and investment from the UK to Ireland post-Brexit, then GDP could increase by 3%.

However, if Brexit was to be accompanied by a downturn in the global economy, these positive effects would be negligible.

Similarly, proposed changes to corporate tax rules across Europe could damage Ireland’s competitiveness.

Housing

The ESRI estimates that, by 2024, housing demand could reach up to 30,000 units per annum. Currently, the demand for housing is around 23,000 per year.

As part of Minister Simon Coveney’s Rebuilding Ireland Plan, the the Build More Homes initiative has ambitious targets to double the annual level of houses being built to 25,000 homes.

However, this increase is likely to place a significant strain on the banking sector, as ESRI analysis suggests that the “traditional deposit base” in Irish banks will be “unable to fund the level of credit required to meet the housing demands of the economy”.

The report said:

Given the calamitous events of the past decade, a significant expansion in the lending capacity of the domestic banking sector will immediately give rise to concerns about the emergence of another credit fuelled bubble.

The ESRI added that prudent measures can be adopted to “reflect the changing circumstances in the market” to prevent such a bubble occurring again.

Read: Fiscal watchdog warns of “loss of momentum” of economic growth

Read: These international problems could seriously wreck Ireland’s economic plans

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