ANALYSIS:With housing accounting for such a large slice of GNP, it was inevitable that any sizeable contraction would inflict severe damage on the growth rate, writes Paul Tansey
WHEN TAOISEACH Bertie Ahern finally calls time on the day job, he has a future as an economic forecaster.
His assessment last Monday that a "hard year" lay ahead for the economy was right on the button. It has been borne out by the latest set of forecasts published yesterday by the Economic and Social Research Institute (ESRI).
Virtually all the economic news over the past three months has been negative. This has caused the ESRI to revise downwards its forecast for Irish economic growth this year from 2.3 per cent to 1.6 per cent.
If these forecasts prove accurate, then the pace of real growth in Gross National Product (GNP) this year will be the lowest since 1988.
These forecasts carry particular weight because the ESRI is an independent research institute with no axe to grind. It calls the economy as it sees it, for good or ill.
For those who might view the forecasts as excessively pessimistic, the ESRI's chief short-term economic forecaster, Dr Alan Barrett, said yesterday: "The threats to the forecast are on the downside."
In other words, the actual economic outcome this year is likely to be worse than the forecast released yesterday
The steep decline in house building is the principal cause of the deterioration in the economy's growth prospects this year. Housing output careered upwards during the early years of this decade, reaching a peak in 2006, when 88,000 housing units were completed.
At that stage, housing loomed so large in the national economy that it accounted for 15.5 per cent of GNP.
With housing accounting for such a large slice of GNP, it was inevitable that any sizeable contraction in the housing output would inflict severe damage on the national growth rate.
As Mr Ahern put it last Monday "Every 10,000 houses less that are built knocks 1 per cent off growth . . . That's the rule of thumb".
While the ESRI estimates that housing completions declined to some 78,000 in 2007, it anticipates that the real housing shock will reverberate through the economy this year.
It is forecasting that the number of housing units built will fall to 50,000 in 2008. This decline in housing output will drag down the volume of overall fixed investment in the economy this year by 7.4 per cent. And it is this drop in investment volumes that provides the principal explanation for the downward revision of the national growth rate to just 1.6 per cent.
The principal victims of the sharp deceleration in the growth rate this year are the labour force and the public finances.
One million people have been added to the national workforce over the past two decades, with the numbers at work rising from 1.1 million to 2.1 million over the period. But the ESRI anticipates that there will be no employment growth this year. While services employment is expected to show an overall increase of 19,000, this will be counterbalanced by a fall of 19,000 in the numbers working in construction and manufacturing.
Anaemic growth will also cause the numbers unemployed to rise. The ESRI is forecasting that involuntary unemployment will increase by 33,000 to 135,000 during 2008.
As a result, the unemployment rate - the numbers out of work as a percentage of the labour force - is projected to rise from 4.6 per cent in 2007 to 6 per cent this year.
The second casualty of weak growth is the Government's financial position. Public spending has been rising rapidly in recent years and particularly swiftly since 2006.
Capital spending was levered up by the launching of the National Development Plan 2007-2013. Current spending accelerated sharply as the 2007 general election hove into view.
While growth was rapid, the economy was throwing off more than sufficient additional tax revenues to finance the Government's ambitious spending plans. But now, with the growth rate stuttering, tax receipts are not just stalling, they are falling.
In the first two months of 2008, total tax revenues were 8.3 per cent below the amount collected in the first two months of 2007.
Dr Barrett acknowledged yesterday that the Government "now finds itself in a very tricky situation" on the public finance front. However, he does not anticipate severe curbs on day-to-day Government spending in the foreseeable future.
The ESRI is forecasting that current Government spending will increase by 7.5 per cent in 2009 following this year's increase of 8.2 per cent. In consequence, the public finances will continue to deteriorate throughout next year.
As a result, the ESRI is projecting that the surplus of €2.3 billion recorded by the exchequer in 2006 will be transformed into a deficit of €7.5 billion by 2009, a near €10 billion turnaround over a three-year span.
After a long lapse, the public finances are back on the national agenda.