Economic growth grinding down to 1980s levels

Thu, May 29, 2008, 01:00

THE ECONOMY is set to slow to a pace of growth not seen since the 1980s, according to Davy Stockbrokers, which has cut its growth forecast for 2008 to 1 per cent from 1.7 per cent, citing a fall-off in consumer spending due to a weakening labour market, tighter credit and a negative wealth effect.

Moreover, the firm does not now expect the economy to bounce back to "healthy" levels of growth of about 3.5-4 per cent until 2010 and, as a result, has also cut its 2009 forecast to 2 per cent from 3.4 per cent.

Rossa White, chief economist with Davy Stockbrokers, said the housing market is acting as a significant drag on the overall economy, keeping growth levels down by around 1 per cent.

While the pace of decline in housing activity has moderated, the market remains mired in a deep recession according to Davy, and the stockbroker is predicting a decrease of 10.7 per cent in house prices in 2008, followed by a further decline of 7.2 per cent in 2009.

For the market to pick up, Davy said that it will be vital for new housing sales to overtake house completions and says that this inflection point will probably be reached some time in the first half of 2009.

The stockbroker is predicting 45,000 house completions this year, but has cut the completions forecast for 2009 to 25,000 from 40,000.

Davy also expects residential investment as a percentage of the economy to fall back to early 1990s levels by year-end 2008.

Commercial building activity has also slowed, and two factors will delay recovery said Davy - the reduction in availability of credit and the likelihood of the European Central Bank cutting interest rates.

The decline in the housing market and associated job losses also means that employment growth is set to slow sharply, with unemployment forecast to reach 6.1 per cent by year, and 7 per cent by the end of 2009. However, declining rates of immigration may act as a buffer.

"Immigration acts as an automatic stabiliser and keeps unemployment in check," said Mr White.

Government finances are also suffering from the housing market slowdown, and Davy predicts that the Government will miss its tax revenue targets by €3 billion this year, with stamp duty, capital gains tax and VAT all lagging official projections. As a result, the general Government deficit may jump to 2.7 per cent in 2008, well above the official forecast of -0.9 per cent, and may breach the deficit limit of 3 per cent in 2009.

Nevertheless, Davy said it is "absolutely critical" that the Government keeps its nerve with regards to meeting its capital spending commitments in both years.

The outlook for indigenous companies is also poor, as Irish corporates continue to suffer from weakening sterling. Mr White does not expect this situation to change in the short term.