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A boom in construction could lead to the economy overheating

A new report forecasts GDP growth of 3.8% this year.

Image: Mark Stedman/Photocall Ireland

A BOOM IN construction could lead to the Irish economy overheating, an economic think tank had warned.

The Economic and Social Research Institute’s (ESRI’s) quarterly economic commentary says that growth in the economy is set to remain strong throughout 2017 and 2018.

The analysis finds that growth to the GDP is forecast at 3.8% this year and 3.6% next year.

This growth will be driven by investment in Ireland as well as consumption.

These are being driven by increased activity in the construction sector, which is bringing higher levels of residential and commercial supply on stream.

This construction boom could also bring down the unemployment rate faster than was previously anticipated.

However, the report warns that an over-production in the construction sector could result in the economy overheating – as production outpaces demand.

“The increased level of construction activity could also cause the unemployment rate to reduce faster than envisaged,” the report warns.

If unemployment were to fall below 5.5% this would almost certainly confirm that the domestic economy is overheating.

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“It is important to continuously compare the actual level of construction in the Irish economy with the underlying, long-run demand for such activity,” said report author Kieran McQuinn.

The report also warns that the “external environment remains highly uncertain” for this year and next year.

Brexit and the chance of the US pursuing protectionist trade policies may result in adverse effects the the Irish economy, the report warns.

“A small open economy particularly reliant on international trade is highly vulnerable to significant changes in international trading conditions,” warned McQuinn.

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About the author:

Cormac Fitzgerald

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