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Economy facing risk of overheating this year – ESRI

By March 30, 2023No Comments

The economy is set to grow more strongly this year than had been expected and may even overheat, according to the latest quarterly bulletin from the Economic and Social Research Institute.

It expects the domestic economy to grow by 3.8% this year while inflation will moderate to 4.5%.

Record levels of employment could stretch the capacity of the economy to overheat this year, hampering attempts to build more houses and other infrastructural projects.

The ESRI says while output in the computer services sector has declined, the number of new jobs in the sector is still close to replacing the numbers being lost in the current slowdown.

Meanwhile, the pharmaceutical sector which accounts for 57% of goods exports, continues to grow.

Only in the accommodation and food services is employment below 2019 levels.

The report also contains a new analysis of inflation which suggests that prices here may have already slowed to an annual rate of just over 4% at the start of the year, just over half the headline rate.

However, it warns that as energy prices fade as a factor behind inflation, domestically generated inflation from the robust economy and food prices may sustain higher prices.

On housing, the Institute thinks a lack of supply relative to demand will outweigh the dampening effect of higher interest rates. It believes prices will still rise moderately and rents will increase this year.

Measured by Modified Domestic Demand, which strips out some of the distortions caused by the activities of multinationals, the ESRI expects the economy to grow by 3.8% this year and 3.9% next year.

It expects inflation to moderate to an annual rate of 4.5% this year before slowing further next year to 3.5%.

It lists the “major challenges” to the economy as the concentration of activity and corporation tax from the ICT sector, tighter monetary policy, an uncertain international economic environment and “persistently high price levels”.

The report also contains research on the effects of the cost of living measures adopted by the government. It says any future measures should be more targeted to avoid adding to inflation.

It also recommends that core social welfare payments be increased in future budgets to keep pace with inflation.

Another research note calculates the deficit in bed capacity in public acute hospitals may be 1,000 inpatient beds which, it contends, “is a key contributor to recent overcrowding issues”.

Research Professor with the Economic and Social Research Institute Kieran McQuinn says there are two contrasting forces at play in the housing market.

There is the issue of supply and demand, he said, which will continue to put upward pressure on the market.

However rising interest rates are acting as a coolant, he added.

Speaking on Morning Ireland, Dr McQuinn said that current inflation problems have been mostly dictated by events outside of the Irish economy.

However, overheating is the result of the economy growing at an unsustainably fast rate, he explained, adding that the economy has been growing strongly for over ten years.

He said there has been a surge of activity in ICT and pharma over the last number of years and there are concerns that if either of those sectors were to suffer a sustained downturn in activity that this would have a negative impact on the economy.

Dr McQuinn also said the banking sector is in a much more stable situation now, compared to 2007.

Article Source: Economy facing risk of overheating this year – ESRI – Robert Shortt – RTE

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