Central Bank warns economy at risk of crisis from ‘overheating’

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Central Bank warns economy at risk of crisis from ‘overheating’


Mark Cassidy. Picture: Eleanor Keegan/Photocall Ireland
Mark Cassidy. Picture: Eleanor Keegan/Photocall Ireland

The economy is at risk of overheating, the Central Bank’s director of economics and statistics has warned, in its latest intervention in a matter of days.

The latest warning, from Mark Cassidy is included in its quarterly bulletin.

It points to continued strong growth, with an additional 100,000 jobs forecast to be created by the end of 2019.

However, that could change with the prospect of an external shock such as a hard Brexit, a retreat globally from free trade and potential shifts in the international tax regime all potential external risks.

The Central Bank has been warning for some time that Ireland is vulnerable to an external shock, but the possibility of a home-grown crisis as a result of overheating is now moving to the fore.

Last Friday, Central Bank governor Philip Lane issued his own stark assessment that policy makers may have to raise taxes to cool elements of the economy, and Finance Minister Paschal Donohoe should have generated a budget surplus by now.

In the bulletin, Mr Cassidy sets out key risks that could set the recovery off course – including as the economy moves towards full capacity, a “risk that continued strong expansion could give rise to overheating pressures”.

Overheating occurs when the pace of growth overtakes the capacity to meet demand – for example when a shortage of available workers forces wages upwards to unsustainable levels.

Governor Lane indicated Government plans for public investment programmes, such as the planned roll-out of schools and roads, may mean activity elsewhere needs to be cooled.

That could be achieved by ratcheting up taxes linked to some types of consumption and investment, such as property tax, to shift resources away from those areas.

The latest Central Bank report shows overall inflation in the economy remains very subdued, including for wages.

“Wage growth, though picking up somewhat, remains moderate, the prospect is for some further increase in the growth rate of average hourly earnings over this year and next, though on balance wage pressures are projected to remain largely contained,” it states.

However, as the economy moves towards full capacity over the next year or so, the risk remains that the continued strong expansion of the economy could give rise to overheating.

“The continued growth in the economy, which is broadly balanced between domestic and export activity, is to be welcomed,” Mr Cassidy said.

“However, there are economic risks facing Ireland from several fronts that cannot be ignored.

“It is clear that a ‘hard’ or disruptive Brexit remains a material risk, while the threat of potential trade wars and changes to international taxation have not abated.

“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.”

Irish Independent

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