Central Bank warns of new boom-bust cycle
The Central Bank has warned that the economy could be in danger of overheating and entering a new boom-bust cycle with full-employment looming and domestic demand continuing to drive growth.
“Domestically, the strength of economic growth means our economy risks hitting full capacity, which gives rise to the risk of overheating or boom-bust cycles.
“This underscores the importance of building fiscal buffers during the good times,” said Mark Cassidy, the Central Bank’s director of economics and statistics.
In its latest quarterly economic bulletin, the Central Bank said the outlook for the economy remains positive, with GDP set to grow by 4.7%.
That is not far short of 2017’s underlying growth rate of around 5% — this year and by 4.2% next.
Its 2018 growth estimate is marginally down from the 4.8% it predicted in its last outlook in April.
Consumer spending growth is expected to ramp up from a weaker-than-expected 1.6% last year to 2.6% this year and stay around 2.5% in 2019.
Growth in underlying domestic demand is also expected to shoot up to 4.4% this year and remain over 4% next year on the back of strong growth in employment and earnings.
An unemployment rate set to drop below 5%, to around 4.8%, next year could provide a trigger for economic overheating where spending demand outweighs production output and inflation rises making current growth rates unsustainable.
“While inflationary pressures remain well contained, the gradual erosion of spare capacity increases the prospects of overheating,” the Central Bank said in its commentary.
“In the labour market, unemployment is approaching levels that have triggered an acceleration in wage inflation in the past.
"A corresponding erosion in domestic cost competitiveness would leave the economy dangerously exposed at a time of increasing uncertainty regarding international growth prospects,” it said.
As the economy gets closer to full employment, there is a question of the extent to which the cyclical strength of the economy may come to pose a risk to the sustainability of stable and balanced growth and give rise to overheating dynamics.
It is not the first time that overheating has been flagged as a potential risk to Ireland’s current economic growth cycle.
In May, the OECD said the economy was showing signs of overheating and it warned of a fresh housing bubble in the event of no cooling down in house price growth.
Last month, economic think-tank the ESRI said full employment could trigger overheating and said there is very limited scope for further tax cuts in October’s budget with the economy not in any need of further stimulus.
However, Mr Cassidy said the current growth trajectory remains good news.
“The continued growth in the economy, which is broadly balanced between domestic and export activity, is to be welcomed.
"So, too, is the projected growth in employment, with our economy due to benefit from an additional 100,000 net new jobs by the end of 2019,” he said.
He said risks to the economic health are mainly external.
Regarding housing, the Central Bank said new building levels should continue to rise with 17,500 new houses likely to be built this year and 22,000 in 2019.
