Analysis: Reaching reduced targets depends on three factors, writes Paul Tansey, Economics Editor

Since its last quarterly bulletin, published last October, the Central Bank has adjusted downwards its forecasts for economic performance in 2008.

The projected growth of real gross national product (GNP) has been reduced from 3.25 per cent to 2.6 per cent while anticipated expansion in real gross domestic product (GDP) has been cut from 3.5 per cent to 3.0 per cent.

However, even following these downward revisions, the attainment of the bank's new growth forecasts for 2008 is contingent on the realisation of three events.

Firstly, the bank is forecasting a 3.6 per cent fall in the volume of gross fixed investment this year, due principally to a projected decline of 8.1 per cent in the real value of building and construction output. In turn, its forecast for construction is based on the completion of 55,000 housing units in 2008. Failure to achieve this level of housing output would challenge the bank's overall growth forecasts for 2008.

Secondly, the bank takes an optimistic view of the country's likely export performance in the year ahead. It is forecasting a 5.8 per cent increase in the volume of overseas sales of goods and services during 2008.

In its favour, it must be conceded that exports outperformed all expectations during 2007, registering estimated volume gains of 6.9 per cent last year. However, the darkening outlook for international demand together with the continued deterioration in Irish competitiveness makes the bank's export forecast a big ask in 2008.

Thirdly, the bank is projecting real consumer spending growth of 3.5 per cent this year, a pale shadow of the 6.3 per cent volume expansion in personal spending seen last year. But in the face of a projected 3.5 per cent inflation rate, and even with the aid of the 2008 budget, consumers will be hard pressed to raise their real personal spending by 3.5 per cent this year if employment is to increase by just 16,000 and non-farm wages are to rise by the 4.1 per cent forecast by the bank.

Weaker growth will also limit additions to employment during 2008. Looser economic conditions should cause inflation to ease back this year, the bank anticipates.

Consumer price inflation, which includes mortgage interest, is projected to reduce from 4.9 per cent in 2007 to 3.5 per cent this year on the assumption that interest rate increases are now off the European Central Bank's agenda.

Excluding mortgage interest, average prices are projected to rise by 2.6 per cent in 2008, a slight improvement on the 2.8 per cent rate of underlying inflation recorded in 2007.