OECD says domestic spending will decline this year

THE VOLUME of domestic demand will fall this year, the Organisation for Economic Co-Operation and Development (OECD) forecasts in its latest Economic Outlook, published yesterday.

This is the first time that an authoritative international forecasting institution has projected that real domestic spending would decline during 2008.

The Paris-based think-tank is forecasting a fall of 0.2 per cent in the quantum of home demand this year, primarily due to a projected decline of 9.2 per cent in the volume of gross fixed investment. Building and construction is the largest component of gross fixed investment in Ireland.

The OECD anticipates that consumer spending volumes will increase by 3 per cent during 2008. Real Government spending on day-to-day goods and services is predicted to rise by 4.3 per cent this year. Together, fixed investment, consumer purchases and Government current spending comprise domestic demand.

The OECD's projection that domestic demand will fall this year differs from the most recent forecast from the Central Bank. In its April Quarterly Bulletin, the Central Bank forecasts a 0.7 per cent increase in the volume of gross domestic expenditure in 2008.

The contrast between the two forecasts over such a short space of time indicates the speed at which the domestic economy is losing momentum.

However, despite the slippage in domestic demand, the OECD still forecasts that the economy will grow this year, driven by the expansion of net exports.

Overall, real Gross Domestic Product (GDP) is projected by the OECD to rise by 1.5 per cent during 2008.

Moreover, the OECD anticipates a modest growth rebound in 2009, with real GDP growth picking up to 3.3 per cent "as the housing construction cycle bottoms out".

Even this projected pick-up will be insufficient to prevent a continuing increase in unemployment. The OECD forecasts that the unemployment rate - the numbers out of work as a proportion of the labour force - will increase from 4.5 per cent in 2007 to 5.7 per cent this year, before rising further to 6.5 per cent in 2009.

Propelled upwards by rising energy and food prices, the OECD foresees an acceleration in the pace of Irish inflation this year. It anticipates that the underlying rate of inflation - excluding mortgage interest - will quicken from 2.9 per cent in 2007 to 3.4 per cent this year. In policy terms, the OECD argues that "wage restraint will be required in the short run to help maintain competitiveness and crowd in foreign demand".

However, the projected acceleration in inflation it forecasts will make wage restraint difficult to achieve in the current pay talks.

Moreover, the efficacy of pay restraint in enhancing price competitiveness has been undermined substantially over the past year by the strengthening of the euro against sterling and the US dollar.