THE CENTRAL Bank has revised downwards its projections for economic growth and revised upwards its forecasts for inflation in 2008 and 2009 in its latest quarterly bulletin, published yesterday.
The net wealth of Irish households fell by almost €50 billion during 2007, equivalent to an average loss of €32,600 for every household in the country, according to research published by the bank in the bulletin.
The decline in household wealth last year reflected falling house prices, a slump in share and pension values and increased household borrowings.
Household wealth is set to contract further this year. "Housing and equity markets have weakened further in 2008 and this will inevitably lead to a further deterioration in household net worth," the bank's researchers conclude.
The bank has cut its forecast for economic growth this year to 0.3 per cent. As recently as last March it was projecting a growth rate of 1.9 per cent in real gross national product for 2008.
Moreover, the prospects of a robust growth-rebound during 2009 are fast disappearing. The bank now foresees growth of 1.8 per cent next year compared to the 3.2 per cent it envisaged for 2009, just over three months ago. These revisions reflect the speed of the downturn in economic activity in recent months.
However, while growth is faltering, inflation is accelerating. The bank is now projecting that consumer prices will increase by 4.5 per cent this year, a substantial increase on the 3.2 per cent inflation rate it was forecasting last March.
The upward revision to this year's rate reflects the fact that the rises in oil and commodity prices have been steeper and more prolonged than previously anticipated.
The bank has also doubled its forecast for consumer price inflation in 2009, from 1.6 per cent to 3.2 per cent. It attributes, in large part, the quickening pace of inflation next year to market expectations of higher interest rates since it prepared its last set of economic forecasts in the spring.
Excluding mortgage interest, the bank has revised upwards its forecast for underlying inflation from 2.9 per cent to 3.5 per cent this year and from 2.2 per cent to 2.5 per cent in 2009.
On these figures, employee pay will fail to keep pace with price rises this year while only matching them in 2009. The data also forecasts that, outside farming, employee pay will rise by 3.9 per cent this year, some way short of the 4.5 per cent forecast for consumer price inflation.
In 2009, the research also anticipates that pay and prices will advance by 3.2 per cent.The forecasts signal that Ireland's prolonged employment boom is over.
The performance of the domestic economy continues to be dragged down by the collapse of construction activity. New house completions are forecast to fall from 78,000 in 2007 to 45,000 this year with a further decline to 35,000 units anticipated in 2009. As a result, the volume of building and construction investment is forecast to fall by 17.4 per cent this year and by a further 6.1 per cent in 2009.
With price rises outpacing pay increases, unemployment rising, employment virtually static and consumer sentiment turning sour, the bank has cut its forecast for real consumer spending growth to 2 per cent this year from 3.4 per cent in its last bulletin.
The effect of a worsening construction downturn and an anticipated further weakening in consumer spending have now caused the Central Bank to project a fall of 1.4 per cent in the volume of domestic spending in 2008.