An expected increase in construction-related activity over the next two years will lead to a consistent fall in unemployment.

But too much growth in the sector could lead to the economy overheating, according to the Economic and Social Research Institute.

In its latest quarterly economic commentary, the ESRI said it expects the unemployment rate to fall to 5.6% by the end of 2018, which would be a faster reduction than previously envisaged.

But it added that any fall below 5.5% would "almost certainly" indicate the domestic economy is beginning to overheat.

Report author Kieran McQuinn said the construction sector "is set to assume a growing importance in the domestic economy over the medium term.

"While this reflects the fact that a significant degree of disinvestment occurred in the Irish economy post-2007, it is important to remember the disproportionate influence of the construction sector prior to 2007.

"Consequently, it is important to continuously compare the actual level of construction in the Irish economy with the underlying, long-run demand for such activity."

Meanwhile, the ESRI report said the growth outlook for the Irish economy remains optimistic, with forecasts of 3.8% and 3.6% for the next two years.

It stated that domestic sources continue to be the driving force of growth with investment and consumption set to make strong positive contributions to GDP over the forecast period.

The report added that if the trends of "continuing improvement in the labour market and rising disposable incomes supported better than expected taxation receipts" persist then the unemployment rate will fall to 5.6% and the Government balance will be in surplus by the end of 2018.

However, the ESRI also warns that the external environment remains "highly uncertain" for this year and next, as a hard Brexit becomes increasingly likely and as the US administration assumes more protectionist trade policies.

Despite this, the outlook for exports is expected to remain positive.