Unemployment may rise rapidly and house prices fall 15 per cent by 2003, according to the latest forecasts from the Economic and Social Research Institute .
Up to 14,000 people could lose their jobs in 2002 across almost all sectors, the ESRI has warned in its flagship publication, the Medium Term Review, which is released today. At the same time, fear of job losses could lead to a rapid downturn in house prices as people delay purchases.
The ESRI's bleak assessment is based on the knock-on effects here of a likely US recession following the attacks on New York and Washington two weeks ago.
Overall economic growth in terms of Gross National Product could fall as low as 1.8 per cent in 2002, from 6 per cent this year and 9.9 per cent in 2000, ESRI research professor, Mr John Fitzgerald, warned. At the same time unemployment would rise to 6.3 per cent in 2002 and to 7.6 per cent by 2003 from 3.7 per cent over the summer.
"There are a couple of hard years ahead but a recovery should begin in 2003 with employment and housing recovering by 2007 with housing back by 2005," Mr Fitzgerald said.
The Central Bank, in contrast in its autumn bulletin published yesterday, has painted a more optimistic picture of the economy going forward. It is predicting that growth will fall back to 3.5 per cent next year following the attacks on September 11th while unemployment will reach 4.5 per cent. However, officials admitted privately that the ESRI's forecasts could be correct if the dollar weakened in value against the euro.
Both institutions warn that forecasting short term events following the US attacks is more than usually difficult. Many variables such as what will happen to oil prices are simply impossible to predict. Much also depends on the course of events over the coming months. However, both agree that over the medium term the economy will bounce back as America recovers. The question is when. According to the ESRI this is likely to be 2003 while the Central Bank has pencilled it in towards the beginning of next year.
What is certain is that tax revenues will be even lower than expected over the rest of this year cutting back substantially the room for manoeuvre in the upcoming Budget.
The ESRI warned that the Government must ensure the budget is neutral with the exception of spending on infrastructure. "Infrastructure investment is vital if you want to protect medium term growth potential," Mr Fitzgerald warned. "Although some projects could still be chopped."
He added that spending cuts did not have to be savage. "Setting the Budget will not be as pleasant as it was in the 1990s but will still be much better than the 1980s."
The ESRI is predicting that growth in the period 2000 to 2005 will average 4.5 per cent. However, Mr Fitzgerald warned that the rise in unemployment would continue even after the economy had turned the corner unless some flexibility in terms of wage cuts was shown or people who lost their jobs took new ones at lower wage rates.
As many as 46,000 more people next year and a further 25,000 in 2003 are likely to join the dole queues over the period as the tens of thousands joining the labour market find it difficult to get a job.
"Unlike the late 1980s those who lose their jobs are unlikely to find the jobs market any better elsewhere as the downturn will be global," Mr Fitzgerald warned.
He added that job losses would be widespread impacting on all sectors from services to manufacturing and high tech to transport and tourism. "The only exception will be the public sector, which may grow, and food processing."
In addition, people who were concerned that they might lose their job would put off buying a house and as a result house prices were likely to fall 15 per cent next year from this year.