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Central Bank warns economy at risk of crisis from overheating

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.

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. There are economic risks facing Ireland from several fronts that cannot be ignored. A ‘hard’ or disruptive Brexit remains a material risk, while the threat of potential trade wars and changes to international taxation have not abated.