ESRI cuts growth forecasts due to weaker global demand and Brexit

Central Bank mortgage rules have reduced new lending by 10%, ESRI research shows

Report author Kieran McQuinn at the publication of a previous commentary Pic: RollingNews

The ESRI hasrevised down its growth forecasts for this year and next due to weaker global demand and the expectedimpact of Brexit although it expects the economy to continue to grow, outperforming many other European economies, and unemployment to continue to fall.

In its latest quarterly economic commentary, the think tank said it expects GDP (gross domestic product) to grow by 4.3 per cent this year, down from its previous estimate of 4.6 per cent, and by 3.8 per cent next year, down from 4.2 per cent.

The ESRI commentary also included research on the impact of recentCentral Bank measures on the housing market in Ireland and found restrictions on loan-to-value and loan-to-income ratios had reduced new mortgage lending by around 10 per cent.

"The effect on the housing market is as yet quite muted with house prices and housing supply being relatively unchanged. However, this is not surprising given the lags involved in construction," report author Kieran McQuinn said. But he warned the full effects of such policies would not be evident for three to four years following their introduction.

"Our results suggest that in the longer term house prices are likely to be 3.5 per cent lower. This decline in house prices leads to lower profitability in construction, which lowers the number of housing units completed in each quarter by approximately five per cent," McQuinn said.

The ESRI expects unemployment to average 8.3 per cent this year and 7.3 per cent in 2017. This compares to its forecasts in the summer commentary of 7.6 per cent in 2016 and 6.5 per cent next year.

“There is now a considerable contrast between the domestic and external components of growth," McQuinn said. "With the former, investment and, particularly, consumption are fuelling present growth rates. On the external trade side, there is evidence of a softening of the growth performance."

The report said that as consumption and investment are set to be the main sources of economic growth this year and next, this points to the need for a neutral fiscal stance in the forthcoming budget on October 11.

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