The Economic and Social Research Institute has reduced its growth forecast for this year, due to a slowdown in world trade and the economic uncertainty caused by the Brexit referendum.

But the ESRI also expects outward migration to end this year, with a net inflow of migrants next year.

The ESRI says the Irish economy is now being driven by domestic growth, with the continuing slowdown in the world economy starting to have an impact on Irish trade. 

The uncertainty caused by the Brexit referendum is also having a slight negative impact, leading the ESRI to cut its growth forecast by 0.2% for this year.

At 4.6% of GDP Irish growth will still be the strongest in the EU, with rising employment and consumer spending expected to reduce the outflow of emigrants to a net zero this year, with a net inward migration of 10,000 expected next year.

But it warns arriving migrants will face a housing shortage and the highest interest rates in the Euro area.

It also cautions that more State intervention in banking will probably make things worse, while too rapid an increase in housing output could lead to the economy overheating.

The ESRI has also warned that Northern Ireland would be the worst hit of all economies, if the UK votes to leave the EU.

It has predicted farming and food producers would be among those paying the biggest price in the event of a Brexit.

In its latest quarterly economic report, the think-tank also suggests any barriers to cross-border trade could "heavily" impact prosperity in the region.

Brexit: Key claims from both sides

Global trade slowdown

The ESRI says recent data suggests the global slowdown in trade may be impacting negatively on the Irish trade sector.  

Due to this the Institute has moved its growth estimate down by 0.2% to 4.6% of GDP and 4.8% of GNP.  For 2017 the outlook is unchanged at 4%.

The UK economy has slowed somewhat this year - attributed to uncertainty as a result of the calling of the Brexit referendum - and this appears to have fed into a weakening of export orders for Irish firms over the past three months.  

While UK growth is forecast to pick up again next year, a vote to leave the EU is expected to put further negative pressure on the UK economy, and by extension the Irish economy.

Noting the publication of the Programme for Government since its last Quarterly Economic Commentary, the ESRI says the commitment given in the programme to adhere to all domestic and European Fiscal rules "is highly important".  

It says "while there is a generally acknowledged need to re-invest n key public services, it is also important that this would take place within the parameters of agreed fiscal space".

It also says that any tax cuts or spending rises should not cause the economy to overheat, particularly in light of the expected continuation of strong economic growth.  

The main areas for concern are housing, tax cuts and pay policy, the institute adds.

In today's report, the ESRI says that housing output, while increasing, will still fall well short of the expected 25,000 units a year it believes is needed to bring supply and demand into line. 

At current rates it says this level may not be attained until 2019.  

It supports the introduction of a tax on unused sites to speed up housing supply, but concedes the picture is complex and will not be easily solved.

It also notes that a sudden spurt in house building towards 25,000 units a year could see unemployment - which is forecast to fall to around 6.5% next year (a low figure by Irish historical standards) - fall further, towards the 4.5% last seen at the height of the boom, when overheating was a feature of the economy.

To counter overheating, the ESRI says the Government may have to think about taking money out of the economy by running a budget surplus.

The Government finances are set to come into virtual balance next year, but a significant surplus may be needed in subsequent years - a position also adopted by the Fiscal Advisory Council, which has backed the idea of a rainy day fund to hold the budget surplus.

The ESRI also adopts a cautious approach to pay deals. It says in the past the Government has often relied on cutting taxes as a way of putting more money in workers pockets instead of increasing wages, but this approach has probably run its course, especially in light of the still fragile public finances. 

It says further erosion of the tax base should be very carefully considered. 

While productivity gains would justify some pay increase, it says the economy cannot afford to give up the hard won competitiveness gains of the past five years.

ESRI urges Government not to  get involved in setting interest rates

The institute also urges the Government not to get involved in setting bank interest rates, saying such a policy is only likely to make things worse for hard pressed Irish borrowers.  

While Irish interest rates are the highest in the Euro area for both mortgage and SME borrowers, the ESRI believes more competition in banking is more likely to reduce rates - pointing to the entry of Bank of Scotland to the Irish market in the late 1990s.  

It says there is a lack of competition in the market despite the very high growth levels - and suggests that the large state role in the banking industry may be putting competitors off.  

It advises the Government to sell its bank shares as soon as possible to reduce state involvement in the banking industry.

The ESRI notes the large gap in interest rates on mortgages between Spain and Ireland - despite the fact that both countries had credit driven property bubbles, which subsequently burst.

It says that Spain has one of the shortest foreclosure periods in Europe, and notes IMF research which suggests that weak repossession regimes lead to higher mortgage costs, as banks price in the risk associated with failure to recover loans.