IRELAND IS now experiencing an economic slowdown. The Central Bank yesterday revised downwards its forecast for economic growth this year to 1.9 per cent.
Last month, the Economic and Social Research Institute (ESRI) projected a 1.6 per cent rate of economic expansion this year. When two of the State's most prestigious forecasting institutions are predicting an annual growth rate of less than 2 per cent, it is time to take an economic slowdown seriously.
The evidence of a slowdown is everywhere apparent. Unemployment is increasing. The seasonally-adjusted numbers on the Live Register climbed to a shade under 200,000 in March, having risen by 28,000 since the start of the year. While the Live Register measures benefit claimants rather than the numbers out of work, it provides a reliable proxy for short-run changes in unemployment.
Government tax receipts are falling below official expectations, indicative of a softening economy. Exchequer returns, published earlier in the week, showed a shortfall of €600 million or 5 per cent in tax receipts during the first quarter of the year.
However, in examining the entrails of the slowdown, it readily becomes apparent that most of the economy is performing quite well. Consumer spending is the largest component of domestic demand, accounting for more than half the total. Even in the absence of payouts from Special Saving Incentive Accounts (SSIAs) this year, consumer spending volumes are forecast to rise by 3 per cent or more in 2008. Following an expansionary budget, the Government is injecting more purchasing power into the economy this year through both its current and capital spending. Exports, which enjoyed exceptional growth during 2007, are set for a further volume increase in excess of 5 per cent this year.
The major problem area at present is house building. The contraction in this sector is subtracting substantially from economic growth. The boom in building saw housing completions reach a peak of 88,000 in 2006, when building raised its share of Gross National Product to an unsustainable 15 per cent. Too many houses were built and the prices charged were too high. Once interest rates rose last year and investors fled the market, housing was heading for a hard landing. Completions declined to 78,000 in 2007 and are projected at 50,000 this year.
While there may be troubles ahead in the global arena, for the present, the principal force dragging down Irish economic growth is largely confined to one specific domestic sector. Moreover, while it may take 12 to 18 months to correct, market forces will resolve the current over-supply of housing. Already, new house prices are being discounted quite heavily. On the demand side, affordability is improving due to falling house prices, rising incomes and stable interest rates.
On the basis that a housing market correction will have been largely achieved by 2009, both the Central Bank and the ESRI are forecasting a real GNP growth rate of 3 per cent or more next year.