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View from Dublin: Will construction sector overheat the economy again?

By Brendan Keenan

Reading the latest quarterly report from the Economic and Social Research Institute (ESRI), the words of veteran US Congressman Barney Frank came to mind.

The financial system was collapsing and then Treasury Secretary Hank Paulson was trying to persuade Congress to approve the $700bn bank rescue Troubled Asset Relief Programme.

The USA is a big country, but that was a lot of money even for it (although proportionately less than Ireland's rescue bill), especially when it was going to the banks.

Mr Paulson explained the disaster which could ensue if the banking system were not rescued - to which Mr Frank sagely replied: "That's all very well, Hank, but nobody ever got elected averting a crisis."

Unfortunately for governments, the role enjoined upon them, especially since the Great Recession, is precisely to avert crises.

But scarred as people are by the recession, there may be few, if any, votes in policies intended to prevent it happening again.

There are several crises which need averting, including Brexit and Trump's attacks on global trade, but where the Irish government has little scope to affect the overall outcome, but must try to minimise the consequences.

The most curious one in the ESRI report is purely domestic, though - how to prevent the economy overheating. Curiouser and curiouser, as Alice said, because the core of this new threat is none other than our old bogey, the construction industry.

You can see why it is beloved of politicians. It is expanding fast again and that means lot of lovely jobs statistics. No other industry can boost, or burst, the economic data quite as fast.

But overheating, so soon after a 15% collapse in output? Surely not. The ESRI gamely tries to explain this confusing turn of events, wheeling out its new improved model of the economy, the COre Structural MOdel of the Irish Economy (Cosmo).

It must be borne in mind that the recession did permanent damage to the economy by way of lost employment opportunities, downsizing of companies and lack of investment in productive capacity. So it may well reach its capacity limits before regaining the peaks of 2007.

This is what Cosmo finds. It is also game of the ESRI to put a figure on that potential, saying the recovery will complete by next year. After that, any growth above potential risks inflationary pressures.

Even braver is the claim that 5.5% unemployment is as low as the jobless rate can safely go. After falling to 6.4% this year, that is the forecast for the end of 2018.

The idea that there comes a point when policy should not try to reduce unemployment any further is never popular, and indeed there are all kinds of statistical uncertainties around the actual figure, which might be subject to revision later.

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