Wednesday, 19 June 2019

Questions (114)

Bernard Durkan

Question:

114. Deputy Bernard J. Durkan asked the Minister for Finance the extent to which issues with the potential to overheat the economy have been identified; and if he will make a statement on the matter. [25850/19]

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Written answers (Question to Finance)

Our economy is in good shape, following several years of economic recovery driven by the export sector, the domestic economy is now increasingly playing an important role in helping to drive growth. Modified domestic demand, a measure of underlying economic activity in the domestic economy, increased by 4.5 per cent in 2018.

Despite the rapid rate of recovery, the main signs of overheating – for instance pay developments, credit growth, and inflation - do not yet suggest that significant overheating pressures have emerged.

The labour market arguably provides the best barometer of the health of the economy at present. The strong growth in employment over the last number of years has continued into this year, with total employment increasing by 81,200 (+3.7 per cent) in the year to Q1 2019. In parallel the unemployment rate has fallen from a peak of 16 per cent in early 2012 to 4.4 per cent in May 2019. This rate of unemployment and the recent signs of a pick-up in earnings are consistent with an economy that is running close to full employment. Although these positive developments in the labour market are welcomed, we need to monitor these development closely as a significant acceleration in wages, would undermine Ireland’s competitiveness.

For 2018 as a whole, Ireland’s inflation averaged just 0.7 per cent, this compares to an average inflation rate of 1.9 per cent for the EU as a whole. The comparatively low level of inflation in Ireland should help to maintain our competitiveness and protect real wage growth. While price pressures have been seen in the housing market, these are more a function of structural imbalances between supply and demand, which we are actively seeking to alleviate, rather than evidence of over-heating.

As in any healthy economy, the pick-up in credit growth has taken hold, albeit at a modest pace. However, since the financial crisis, a number of additional safeguards have been put in place to prevent the unsustainable build-up of credit, most notably the introduction of the macro-prudential regulations by the Central Bank.

Over the medium term, with the domestic economy expected to drive growth, it is important that we remain cognisant of the potential upward pressure this will place on both prices and wages, which could give rise to a loss of competitiveness. Indeed, in order to prevent overheating pressures emerging we must focus on maintaining competitiveness-oriented policies, whilst avoiding pro-cyclical policy measures. To this end, the Government will continue to implement budgetary policies designed to ensure economic stability and fiscal sustainability. This prudent approach to our public finances will help to mitigate against any future downturn in economy activity.