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Irish economy on the brink of overheating stoked by ongoing Brexit uncertainty

The report claims Ireland’s economy is not yet overheating, but if trends continue, it could do so within the next two years.

File photo
File photo
Image: Shutterstock/anyaivanova

THE IRISH ECONOMY is on the brink of overheating if current trends continue, according to a report from the Nevin Economic Research Institute. 

The NERI quarterly report points to Brexit uncertainty as a significant risk to both the Republic of Ireland and Northern Ireland economies. 

It reports the Republic of Ireland’s economy is not yet overheating but if trends continue, could do so within the next two years.

GDP in Ireland will grow by 4.6% in real GDP terms this year, and by 3.3% in 2020. 

Forecasted growth in the labour market until the end of 2020 “will increase the bargaining power of workers [and] average hourly earnings will be growing at 4% annually by the end of 2020″. 

As price inflation will continue to rise by about 2%, real wage growth will be close to 2% in both 2019 and 2020. 

This is buoyed by the strong declines in unemployment in recent years, and the consequent wage growth as the labour market tightens, but this is contingent on a soft-Brexit. 

The report states: “The domestic Irish economy’s cyclical upswing has now been ongoing for seven years and shows little sign of abatement. The unemployment rate fell to 4.5% in June. 

“Employment growth was an unsustainable 3.7% in the first quarter of this year following growth of almost 3% in both 2017 and 2018.

A no deal Brexit would severely damage the Republic’s economic performance in 2019 and beyond.

Ireland’s economic growth over the next two months is reliant on domestic activity as growth in exports could be impacted by a no deal Brexit, and which leaves the economy at risk of overheating. 

“The economy will be overheating by the end of our forecast horizon, and perhaps even by the end of this year, assuming a benign, or at least delayed, outcome to the Brexit crisis,” the report said. 

While “strong employment and wage growth will drive demands for consumption goods from the household sector,” a slowdown in the manufacturing sector indicates “Brexit concerns as well as an uncertain international trading agreement. 

Northern Ireland

The NERI quarterly report has identified a number of red flags in the outlook for the Northern Irish economy, which it says could be a real indicator of the Brexit effect. 

Early indications are that the Northern Ireland economy is already experiencing negative outcomes from the ongoing Brexit uncertainty.

The economy would deteriorate further in the event of a no-deal Brexit, according to the economic think tank, which highlights a slowdown in manufacturing, and “chronic and persistent levels of low pay” already.

While many sectors, including manufacturing and services fell, exports from Northern Ireland grew by 4.4%, but “the Republic of Ireland remains Northern Ireland’s most important export market” which poses a huge risk in the event of a no-deal Brexit. 

In the Republic of Ireland, the report recommends a renegotiation of taxation in areas of property and wealth taxes to generate tax revenues and mitigate any damage from overheating. 

NERI senior researcher, Dr Tom McDonnell said: “Ireland’s fiscal policy should be reoriented towards sustainable, inclusive growth.”

“We can improve the growth friendliness of our tax base by reorienting the tax base in favour of higher taxes on property and wealth,” he added. 

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