ESRI: Activity in construction sector driving investment

The growth outlook for the Irish economy remains optimistic for 2016 and 2017 with growth forecasts of 3.8 and 3.6 per cent respectively, according to the ESRI Quarterly Economic Commentary.

The report states that domestic sources continue to be the driving force of growth with investment and consumption set to make strong positive contributions to GDP over the forecast period.  Increased activity in the construction sector is impacting both investment and consumption.  At the moment, higher levels of residential and commercial supply are increasing investment while higher actual and implicit rents are some of the main determinants of consumption.

In 2016, the continuing improvement in the labour market and rising disposable incomes supported better than expected taxation receipts. If these trends continue the unemployment rate will fall to 5.6 per cent and the government balance will be in surplus by the end of 2018.

The external environment remains highly uncertain in 2017 and 2018 as a hard Brexit becomes increasingly likely and as the US administration assumes more protectionist trade policies. Notwithstanding the risks to the trade forecasts, the outlook for exports is expected to remain positive overall as the US and European economies are expected to grow at a reasonable pace over the next two years.

Author Kieran McQuinn commented, “The construction sector is set to assume a growing importance in the domestic economy over the medium term. While this reflects the fact that a significant degree of disinvestment occurred in the Irish economy post-2007, it is important to remember the disproportionate influence of the construction sector prior to 2007. Consequently, it is important to continuously compare the actual level of construction in the Irish economy with the underlying, long-run demand for such activity.”

Dr McQuinn also said, “In light of external risks, the Irish economy must seek to minimise the impacts of trade-related adverse shocks. This entails maintaining competitiveness in labour markets and strengthening productivity growth in general.  A small open economy particularly reliant on international trade is highly vulnerable to significant changes in international trading conditions.”