THE IRISH economy is set to grow at a slower pace this year than at any time in the past two decades. The Economic and Social Research Institute (ESRI) has revised downwards its forecast for economic growth in 2008 to just 1.6 per cent, due principally to the severity of the contraction in house building.
The ESRI's latest growth forecast for 2008 is well below the 2.8 per cent real expansion rate projected for the economy by Minister for Finance Brian Cowen in this year's budget. The deterioration in the economic outlook over the past three months has caused the ESRI to adjust downwards its own forecast for real growth in gross national product this year from 2.3 per cent to 1.6 per cent.
While economic growth is slowing, inflation is picking up again. The annual rate of inflation accelerated to 4.8 per cent in February from 4.3 per cent in January, according to the Consumer Price Index, published yesterday by the Central Statistics Office.
When mortgage interest is excluded, the annual rate of price increase still quickened to 3.5 per cent in February from 3.1 per cent in January. In the 2008 budget, the Government had forecast that, excluding mortgage interest, average prices would rise by 2.4 per cent this year.
The decline in house building is the principal factor driving this year's growth rate downwards. In its latest quarterly economic commentary, published today, the ESRI is forecasting 50,000 housing completions this year, a sizeable drop on the estimated 78,000 houses built in 2007. In turn, the decline in housing output is expected to force a 7.4 per cent fall in the volume of gross fixed investment during 2008.
Moreover, the ESRI foresees a continuing weakening in housing construction into 2009, projecting a further decline to 45,000 completed housing units next year. However, the ESRI predicts that the fall in house prices may already have been arrested. It reckons that house prices in the early part of 2008 are some 15 per cent lower than in December 2006. On this basis, the commentary concludes: "For 2008 and 2009, we expect generally stable house prices."
Following the consumer boom of the past three years, the growth in the volume of household spending is forecast to ease back to 3.0 per cent in 2008. The ESRI is projecting that money wage growth will decelerate from 5.5 per cent in 2007 to 4.0 per cent this year.
The first casualties of slower growth will be the labour force and the public finances. No increase in employment is now expected this year, while the numbers out of work are projected to rise by 33,000 to 135,000 in 2008.
As a result, the unemployment rate - the numbers out of work as a percentage of the labour force - is expected to increase to 6.0 per cent in 2008 from 4.6 per cent last year.
The economic slowdown is also pushing the public finances deeper into deficit. Already, the weakening pace of activity growth is causing tax receipts to slip significantly below the targets set by the exchequer. At the same time, public spending - current and capital - has been rising rapidly since 2006.
As a result, the ESRI forecasts that an exchequer surplus of €2.3 billion in 2006 will be transformed into an deficit of €7.5 billion by 2009. This represents a deterioration of almost €10 billion in the exchequer's annual financial position in the space of just three years.
After a tough year in 2008, the ESRI anticipates a modest recovery in 2009. Growth in real gross national product is forecast to accelerate from 1.6 per cent this year to 3.0 per cent in 2009.
The revival in growth prospects in 2008 is based on the assumption that the housing shock will largely be absorbed this year. Strong growth will clear the way for a resumption in employment expansion and the ESRI projects that 24,000 people will be added to the workforce during 2009.