Surplus may be needed to avoid overheating - ESRI
Published 16/03/2016 | 02:30
The new Government may have to run a budget surplus next year to avoid the economy overheating, the Economic and Social Research Institute (ESRI) has said.
The think tank said the economy will grow by about 4.8pc this year and 4.1pc in 2017, narrowing the deficit to about 1pc at the end of 2016 and achieving a near balanced budget next year.
But ESRI associate professor Kieran McQuinn said if this strong growth does occur, the Government will need to take action to ensure the economy doesn't bubble over, as it will be at or near its potential level by the end of 2016. In fact, the ESRI is forecasting the economy will grow marginally stronger than its potential growth rate in 2017.
"Given that the output gap is closing, we may well reach the stage next year where we need to target a surplus just to ensure that the economy doesn't overheat," he said.
In its latest economic update, the think tank said unemployment is expected to fall to 8.7pc by the end of the year and below 7.5pc by the end of 2017.
The update comes as Moody's Investor Service gave an upbeat assessment of Ireland's economy in the wake of last week's strong GDP figures, saying it was upgrading its growth forecast for this year to 5pc.
The Irish economy last year grew by 7.8pc, which was much faster than many economists were expecting.
Moody's said it now expects a rapid decline in Ireland's public debt ratio, which it described as a "credit positive".
The New York-based agency said it has revised its growth rate to 5pc for this year - half a percentage point higher that just a few months ago - and moderating to 4pc in 2017.
Moody's said growth has become increasingly broad based and was also supported by domestic demand, which it also described as a credit positive.
"The strong recovery allows for a very rapid improvement of Ireland's public finances," the agency said.
"We expect the public debt ratio to have been 94.5pc of GDP in 2015, declining to less than 90pc of GDP this year. Our expectations for the debt ratio are now generally five or six percentage points of GDP lower than just a few months ago."
Meanwhile, data from the Central Statistics Office showed that the trade surplus has hit the highest level on record. Preliminary figures for January revealed that seasonally adjusted goods exports fell by €624 million, or 6pc, to €9.6bn. Seasonally adjusted goods imports decreased by €1.7bn or 27pc to €4.6bn leading to an increase of €1.1bn or 28pc in the trade surplus to €4.9bn.
Alan McQuaid of Merrion Stockbrokers said the €4.9bn figurre beat the previous all-time high of €4.7bn posted in August 2012.
"Despite concerns over exports to the UK, we still think the overall trade surplus this year will be higher than in 2015. We are now projecting a positive trade balance of €50bn plus," he said.