The Central Bank has warned that there is a risk of overheating in the economy as a result of continued strong growth bringing it close to full capacity.

Its latest quarterly bulletin says the monetary authority expects continued strong growth, supported both by the strength of domestic activity and the favourable international environment.

However, it also warns about the “material risk” of a hard Brexit in addition to sounding an alert in respect of protectionism and potential shifts in the international tax regime.

Based on data from the Central Statistics Office, the Central Bank has cut its forecasts for housing supply by 6,000 units for this year from its April bulletin. It expects housing completions to number 17,500 this year instead of 23,500, and 22,000 in 2019 as against 28,500.

Its third bulletin this year reports on trends in the economy and says:

In Association with

• Domestic demand will provide the main stimulus to growth, with underlying domestic demand expected to grow by 4.4% this year and 4.1% next year
• Continuing broad-based growth in employment will continue, though at a more moderate rate. The unemployment rate is forecast to average 5.4% in 2018 – revised down from 5.6% in the April bulletin – and 4.8% next year
• Inflation is expected to remain moderate at 0.7% this year and 0.8% next year.
• Key components of domestic investment, such as building and construction, continue to rebound, though from a relatively low base.

Director of economics and statistics Mark Cassidy said: “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.

“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.”

The Central Bank’s figures show that the rate of increase in consumer expenditure again recovered in 2018 from a decline in 2017 — it expects growth to be 2.6% compared to last year’s 1.6% — which combined with other elements such as public consumption and capital expenditure would boost the increase in underlying domestic demand from last year’s 2.9% to 4% this year.

While wages and salaries per employee rose by 2.2% 2016, the rate of increase slipped back to 0.8% last year, but the bank expects a rate of 2.8% this year and 3.3% next.

On inflation, the bank expects that the price of goods will continue to fall this year and next, while services will go up by an expected 1.9%, yielding an overall inflation rate of 0.6%.

The bulletin says: “Projections for the labour market indicate that the economy is heading towards full employment and, while some extra capacity is possible through broader participation in the labour market, capacity is set to tighten.”

However, it suggests that the risk of actual overheating is low: “While overall price inflation remains very subdued and wage growth remains moderate, the prospect is for some further increase in the growth rate of average hourly earnings over this year and next, though, wage pressures are projected to remain largely contained.

“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.”