DBRS Publishes Commentary titled Hot Irish Economy: Less Vulnerable Today Despite Signs of Overheating

DBRS Ratings Limited (DBRS) published a commentary titled “Hot Irish Economy: Less Vulnerable Today Despite Signs of Overheating”.

Concerns are emerging that the Irish economy is overheating, as key labour and real estate indicators are showing pre-crisis growth rates. Despite signs of growth above potential, risks to the economy are lower today than a decade ago. This commentary compares the composition of current economic growth against the pre-crisis performance. It concludes that the Irish economy is currently less vulnerable to an economic slowdown than a decade ago.

The strong growth in property prices resembles the growth rates seen in the run-up to the crisis. However, property price dynamics today are very different than 10-years ago, when dramatic price growth was fuelled by rapid credit growth and the re-leveraging of households. DBRS sees no evidence of a real estate bubble. Today, price pressures primarily stem from the under-supply of housing. Likewise, the labour market, though it appears as tight now as it was in 2007, is less vulnerable to domestic slowdowns because the strong pace of employment growth is broadly based and not driven by construction activity, as it was in the pre-crisis period.

While the evidence for economic overheating appears less convincing today than a decade ago, the current environment is not without domestic risks. An extended period of strong expansion well above measures of growth potential, and in a context of a positive output gap, could re-ignite the boom-bust dynamic that has previously beset the Irish economy. So far, inflation remains subdued – but more rapidly rising wages, house prices and inflation would be signs of an emerging problem. For the time being, it is DBRS’s baseline that the economy will gradually decelerate towards potential growth rates.

This commentary is available at www.dbrs.com.