DUBLIN (Reuters) - Ireland's central bank on Friday raised its economic growth forecast for 2018 and 2019 on stronger than expected domestic demand, but warned that even an orderly Brexit would significantly dent growth over the next several years.
In a quarterly report on the health of the economy, the central bank estimated that gross domestic product (GDP) would expand by 6.7 percent this year and 4.8 percent next year, up from forecasts in July of 4.7 and 4.2 percent respectively.
The Irish government last week forecast GDP growth of 7.5 percent in 2018 and 4.2 percent in 2019.
Ireland has posted the fastest economic growth in the European Union every year since 2014 but the relevance of using the GDP benchmark has been put into doubt by foreign investment flows skewing the figure.
The central bank said underlying domestic demand, a measure that strips out the impact of investment flows by Ireland's large multinational sector, would grow 5.6 percent this year and 4.2 percent next year.
"The underlying picture suggests that the growth of domestic economic activity gathered pace in the first half of 2018," the report said. "Supported by strong and sustained employment growth and improving household balance sheets, growth in consumer spending has gained momentum."
Growth is also being boosted by construction, with housebuilding growing by around 25 percent per year as the country struggles to make up for several years of minimal construction in the aftermath of the country's economic crisis, the bank said.
The bank also published new estimates of the impact of Brexit on Ireland. If Brexit leaves World Trade Organisation rules governing trade between Britain and Ireland, Ireland's GDP will be 2.9 percent lower in the long run.
If the Brexit proposal favoured by British Prime Minister Theresa May - the so-called Chequers option - Irish GDP would be 1.7 percent smaller than if Britain remained in the EU's single market and customs union, it said.
(Reporting by Conor Humphries; Editing by Toby Chopra)
