Economy to weaken more than previously anticipated

Growth in the Irish economy will weaken next year, with the extent of the slowdown more pronounced than had earlier been anticipated…

Growth in the Irish economy will weaken next year, with the extent of the slowdown more pronounced than had earlier been anticipated.

In its latest quarterly bulletin, published yesterday, the Central Bank forecasts that growth in real gross national product (GNP) will decelerate from 4.75 per cent in 2007 to 3.25 per cent next year.

Domestic demand - the economy's engine in recent years - is now beginning to run out of steam. The bank forecasts that the rate of growth in real spending in the domestic economy will decelerate from 4 per cent in 2007 to 2.5 per cent next year. Domestic spending embraces consumer purchases of goods and services, investment in construction and business equipment, and the Government's day-to-day spending.

The expected weakening in real domestic expenditure during 2008 is due to a near-halving of the forecast rate of real consumer spending growth next year, combined with an expected fall in the volume of gross investment resulting from the downturn in the construction sector.

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The pace of real consumer spending growth is predicted by the bank to decelerate from a booming 7 per cent in 2007 to 3.75 per cent in 2008.

The bank's latest forecasts for economic performance in 2007 and 2008 are shown in Table 1.

Since its last bulletin, the Central Bank has cut three-quarters of one percentage point off its forecast for Irish economic growth in 2008.

As recently as July, the bank was projecting that real GNP would increase by 4 per cent next year. Now it has revised down its forecast GNP growth rate for 2008 to 3.25 per cent.

A more severe stalling of activity in construction than earlier anticipated, together with some slippage in expected export growth next year, are the principal reasons for the downward restatement of the economy's growth prospects for 2008.

The bank has also trimmed back its forecast for economic growth this year, from 5 per cent to 4.75 per cent.

Even allowing for its downward revisions, the bank's economic forecasts for this year and next must be classed on the sunny side of expectations. It expects real consumer spending to increase by 7 per cent this year.

In its support, retail sales volumes have been growing by about 7 per cent so far in 2007; employment is set to rise by some 60,000, or 3 per cent; and there is a bundle of Special Saving Incentive Account cash bulging in consumers' pockets.

On the debit side, national accounts data for the first six months of the year show real consumer spending advancing by only 5.8 per cent compared to the first half of 2006, while consumer surveys indicate that household confidence is ebbing as the future becomes more uncertain.

For 2008, the bank anticipates that the rate of growth in real consumer spending will almost halve, to 3.75 per cent. Although this represents a marked slowdown, it is still based on employment growth projections that are quite optimistic. The bank forecasts that total employment will increase by 32,000, or 1.5 per cent.

While this appears conservative compared to the employment expansion of previous years, it factors in a 12,000 reduction in construction employment next year. This implies employment growth of 44,000, or almost 2.5 per cent, in the non-construction economy in 2008, a performance that would command wide applause.

Real gross fixed investment is forecast by the bank to increase by 1 per cent this year, with a 2.75 per cent fall in building and construction being more than offset by a 15 per cent increase in investment in plant and machinery. Next year, the bank anticipates that gross fixed investment will turn negative, dragged down by a 3 per cent fall in construction.

However, the housing output projections on which the bank frames part of its construction forecasts look slightly optimistic, particularly in relation to 2008. Housing completions reached 88,000 in 2005, net of 5,000 delayed ESB connections. For 2007, the bank forecasts 75,000 completions, followed by a further 65,000 completions in 2008.

The realisation of these construction forecasts would represent an act of great fortitude on the part of Irish builders. It implies that, in extremely trying market conditions, they will continue to add to the national housing stock, which already contains 200,000 empty houses, at a pace that far exceeds the rate of household formation.