The failure of Ireland's political parties to form a government could jeopardise Ireland's economic recovery, stockbroking firm Goodbody has warned.

It comes as small business group Isme said the "developing circus" over the formation of the next government and trade union wage demands were having "a major negative effect" on business confidence and expectations.

The ongoing government policy vacuum, combined with record-low levels of public investment, could soon threaten the recovery if the political uncertainty continues, an economic report by Goodbody states.

“A vacuum exists when important policy initiatives in the areas of housing, infrastructure and health need to be addressed,” said Goodbody chief economist Dermot O’Leary.

Despite rising international risks led by the potential exit of the UK from the European Union, "stellar" Irish growth is expected to continue in 2016, with consumer spending in the first quarter of the year likely to be higher than it was at its peak in the fourth quarter of 2007.

The political stalemate has had little impact on the economy to date. However, “lingering potential uncertainty has the potential to impact ongoing economic expansion”, according to Mr O’Leary.

“The longer the policy vacuum continues, the bigger the risks get.”

The Goodbody economist suggests that a minority government led by Fine Gael is now more likely than a Fine Gael-Fianna Fáil coalition, but that regardless of the outcome, "any radical shift away from the policies of recent years is highly unlikely".

Mr O’Leary calls for a renewed focus on capital spending, “which, despite recent announcements, will remain worryingly low over the coming years”.

The economist also recommends tweaks to the Central Bank mortgage lending rules introduced last year. The rules, which introduced higher deposit requirements, should be adjusted to recognise both the stage of the housing cycle and geographical differences in markets, he said.

Although the measures have been successful to date in their bid to prevent another bubble in prices, they have also had some unintended consequences such as upward pressure on rents and a “disporprotionate effect on higher-priced markets, particularly in the capital”.

Higher rents, though only partly the result of the new rules, had “heaped” further pressure on the social housing and also increased the prevalence of homelessness, Mr O’Leary writes.

Separately, a new MyHome.ie report by Davy Research chief economist Conall Mac Coille today outlines the extent to which the impact of the tighter lending rules have been mainly felt in Dublin and commuter belt areas.

The housing supply in Dublin may tighten further, as the “ambitious” homebuilding goals set under the last government’s Construction 2020 strategy is unlikely to be reached with no new stable coalition yet formed, the report notes.

Meanwhile, small business group Isme said the “developing circus” over the formation of the next government and trade union wage demands were having “a major negative effect” on business confidence and expectations.

Isme’s latest quarterly business trends survey finds that sentiment among SME owners has slipped in 2016 following a gradual improvement over 2015. The mood among manufacturing firms was described as “very worrying” by the group.

"Increasing business costs, the continuing difficulties in accessing bank finance and scaremongering over Brexit have added to the external factors of threats of euro zone deflation and adverse currency movements," said Isme chief executive Mark Fielding.

“The current impasse in the election of a new government and the threatening industrial relations climate is having a major negative effect on SME sentiment. The lack of confidence to govern, shown by all parties in the new Dáil, is a disgrace,” he said.

“With a spring economic statement due within the month, it is imperative that we have a stable government. The call to all politicians is ‘Get on with it’.”

Minister for Finance Michael Noonan conceded last month that the acting government may miss its deadline to submit its spring economic statement to the European Commission.