The Economic and Social Research Institute (ESRI) has warned that the Government risks overheating the economy as it invests in housing, climate change and healthcare post-Covid.
In its quarterly economic commentary for Autumn 2021, the think tank said the Irish economy would register double-digit growth of 12.6 per cent this year and 7.1 per cent next year.
The growth comes on the back of a resurgence in consumer spending and multinational related activities, in particular strong export figures, it said.
The stronger-than-expected performance is set to ease pressure on public finances and reduce unemployment, it said, with unemployment expected to fall to 9 per cent this year, down from a pandemic high of 31 per cent in April 2020.
However, the think tank also warned that the rapid growth in the domestic economy, combined with increased public investment, posed a significant risk of overheating and will be “a key challenge for fiscal policy over the medium-term.”
Overheating occurs when demand exceeds the productive capacity of the economy, bidding up prices and wages and eroding competitiveness.
The think tank said it believed that current inflationary pressures will peak towards the end of this year before abating.
“The recovery from Covid-19 has contributed to inflationary pressures in many advanced economies stemming mainly from global supply chain problems and energy prices,” it said.
“While the current expectation is that these factors are largely temporary, further domestic inflationary risks remain relating to the rapidity of the recovery in household spending as well as how price changes feed into wage expectations.
“At this juncture, our expectation is that inflationary pressures will peak in Q4 2021 and abate through 2022. We expect an inflation rate of 2.3 per cent in 2021 and 2.5 per cent in 2022.”
The ERSI also said it did not expect the unemployment rate to fall back to pre-Covid rates until late 2023 “at the earliest”.
“The significant reduction in unemployment along with strong underlying growth in taxation receipts has contributed to a smaller deficit in 2021 than expected,” it said.
“The eased pressure on the public finances comes at a time when significant investments will have to be made in the years ahead to tackle issues such as housing, climate change, and healthcare.
“Making these investments, while ensuring the domestic economy does not overheat, will be a key challenge for fiscal policy over the medium-term.”