THE GOVERNMENT'S economic difficulties mounted yesterday as it was hit by figures showing that output contracted in the first quarter of the year, largely on the back of a precipitous slide in construction.
The problems facing the Government were accentuated by the rise in euro zone inflation to a record 4 per cent - making an interest rate increase by the European Central bank (ECB) on Thursday almost inevitable.
The Government's difficulties have been compounded by a €1.2 billion shortfall in tax receipts in the first five months of the year, a shortfall that could be extended when Exchequer returns for the first half of the year are published tomorrow.
Figures from the Central Statistics Office yesterday showed that real Gross Domestic Product (GDP) fell by 1.5 per cent in the first three months of this year compared to the first quarter of 2007.
Real GDP in the first quarter of 2008 was dragged down by a fall of one-sixth in building and construction output compared to a year earlier. Within the construction sector, the output of new houses in the first quarter was 30 per cent lower than a year earlier. Industrial production also registered a decline of 0.9 per cent between the first quarters of 2007 and 2008. Industry, including construction, makes up almost one-third of GDP.
As a result, the CSO data suggest that the private sector is now contracting and only the public sector is exhibiting any appreciable growth. Public administration and defence registered 2.2 per cent volume increase between the first quarters of 2007 and 2008 while the continuing expansion of the health and education services underpinned a 4.5 per cent rise in the volume of other services over the past year.
This presents the Government with a tough choice. The 2008 budget has drifted far off course in the first five months of the year, with tax receipts undershooting targets by almost €1.2 billion or 6.4 per cent.
The Exchequer returns, to be published tomorrow, will show whether this deterioration has continued through June. In the face of a widening budget deficit, attempts to compensate for the tax shortfall by tighter controls on public spending will edge the economy closer to recession. The Cabinet will get a briefing today on the state of the public finances from Minister for Finance Brian Lenihan, but a decision on spending cuts for the second half of the year is not expected until next week, according to Government sources.
The Government's efforts to contain public spending were made no easier yesterday as the annual inflation rate for the euro zone climbed to 4 per cent, in June, its highest-ever level. With euro zone inflation now running at twice its target rate, an increase in euro interest rates appears inevitable when the ECB meets on Thursday.
The problems confronting the private sector are compounded by the stalling of the country's export drive. Having recorded a 6.8 per cent growth in export volumes during 2007, primed by exceptional growth in the volume of services exports, foreign sales went flat in the first quarter of this year. Export volumes in the first quarter registered an increase of just 0.5 per cent on the quantum of goods and services sold abroad a year earlier.
The volume of services exports - now over two-fifths of total exports - edged ahead by just 0.8 per cent in the first three months of the year. The weakening of exports reflects the impact of slower growth in Ireland's major foreign customers and the damaging consequences of the steep rise in the value of the euro against sterling and the dollar.
While the national accounts for the first quarter of the year show a 1.5 per cent decline in real GDP, the volume of Gross National Product (GNP) increased by 0.8 per cent between the first quarters of 2007 and 2008. The advance in real GNP is wholly attributable to a reduction of €1 billion in the net outflow of factor incomes - primarily profits, dividends and interest - from Ireland to the rest of the world.