End of Celtic Tiger next year, says ESRI

Economic forecasts:GDP predicted to slow to a 'more sustainable rate', writes Marc Coleman, Economics Editor.

The period of exceptional economic growth known as the Celtic Tiger will come to an end next year, according to two new economic forecasts released yesterday.

In an assessment of the sustainability of the economy's 15-year-long boom, the Economic and Social Research Institute (ESRI) also warns that it is now "imperative" to stop the economy from losing competitiveness.

According to forecasts contained in the ESRI's latest Quarterly Economic Commentary, Gross Domestic Product (GDP) is set to grow this year by 5.4 per cent before slowing to what the authors term a "more sustainable" rate of 3.9 per cent in 2008.

Davy stockbrokers forecast, also published yesterday, suggests the economy will expand by 4.5 per cent this year, slowing to 3 per cent in 2008. Growth in GDP - the traditional measure of economic output - has remained above 4 per cent every year since 1993.

Davy's yesterday revised downwards their forecast for 2007 from 5 per cent, in response to data released by the Central Statistics Office (CSO) on Wednesday, which showed that new house building fell by 1.7 per cent year-on-year in the final quarter of last year, the first fall since 1997.

The data also reported that net exports - the contribution of exports to the economy adjusted for imports - declined by 10.2 per cent in the same period.

"This slowdown in growth is driven by a slowdown in housing investment, while investment in other building and construction should continue to grow strongly, driven in part by investment under the latest NDP," ESRI economist Dr Ide Kearney said yesterday.

Describing the latest ESRI forecasts as a "soft landing", she added that the economy was becoming more vulnerable to the housing market.

"A decline in real house prices could lead to a much larger reduction in the scale of house building."

The ESRI has calculated that, of the 310,000 houses built in the last four years, some 122,000 are now lying idle "Is this sustainable? We would argue not, but we are forecasting a soft landing for the economy," Dr Kearney said.

Dr Kearney, who along with Dr Alan Barrett and Yvonne McCarthy wrote the commentary, said inflation would continue to decline from its early-2007 peak of 5.2 per cent. However, it is expected to average 4.6 per cent for the year.

This is higher than previous ESRI projections, a move attributed to the expectation that the European Central Bank will raise interest rates once more this year. According to the ESRI forecasts, actual house prices will grow at rates below the rate of inflation this year and next, reducing the degree of overvaluation in the market.

However, Dr Kearney warned that speculators could trigger a "much sharper correction" in the market if confidence was damaged. "We need to find out why people are buying second houses and we don't know. That's key."

Davy economist Rossa White said new house building would fall by some 5,000 units in 2008, acting as a "drag" on the economy.