Ireland's economy will grow at the slowest pace in more than two decades this year as a 17 per cent slump in construction pushes up unemployment, the Central Bank said today.
GDP growth of 0.6 per cent, forecast for this year, is the weakest since 1986, the bank said in its quarterly bulletin.
But this should accelerate to 2 per cent next year the bank forecast, adding that the balance of risk for both years “is on the down side”.
“There is a reduced level of demand related to weak confidence and expectations regarding the future path of house prices as well as an overhang of supply,” the bank said.
"A pick-up in output growth to about 2 per cent is forecast for next year, on the basis of a gradual stabilisation in the domestic housing market during the course of the year and a modest recovery in exports," the bank says in its quarterly bulletin today.
"Although housing output is declining to a level which is somewhat below the sustainable level relative to underlying housing need, a major uncertainty is the extent of the overhang in supply."
The bank also said the moderation in services exports was "disappointing", since this sector has been the main driver of export growth in recent years.
"A number of sectors contributed to the weaker outturn in the first quarter including trade-related services, a particularly volatile component, insurance services and financial services. However, computer services, the
largest contributor to services exports overall, remained buoyant. The moderation in financial services exports may reflect an impact from financial market turbulence and is of some concern," the bulletin said.
The housing downturn has curbed building, undermined consumer confidence and pushed unemployment to a 10-year high. In June, the Economic and Social Research Institute forecast that the economy may experience its first recession in a quarter of a century this year.
About 45,000 new houses will be built this year, the bank said, 5,000 fewer than forecast in April and a decline of 42 per cent from a year ago.
Mortgage lending in June grew at the slowest annual rate in almost 17 years, it said in a separate report today, as the credit-market turmoil pushes lenders to impose tighter rules for loans and raise borrowing costs.
The slowdown in economic growth will have “negative consequences” for the labour market with “no prospect'' for employment growth in 2009, the Bank said.
It also predicted rise in unemployment 5.9 per cent in 2008 from 4.5 per cent last year, and to 6.8 per cent in 2009.
"The poor outlook for domestic demand both this year and next will have negative consequences for the labour market with minimal growth in employment this year and the prospect of no employment growth next year," the Central Bank said.
"Although labour force growth is set to ease back also, reflecting a weaker trend in participation and a drop off in inward migration, the unemployment rate is nevertheless set to increase significantly to an average of 5.9 per cent this year and 6.8 per cent next year."
Credit growth, which measures the level of borrowing by consumers fell to 14.3 per cent in June.
Additional reporting: Bloomberg