Following data revisions, the Irish economy’s performance over the past five years was even stronger than originally thought; growth averaged 5.5% a year, and is now put at 6% in 2007.
- Fall in housing completions in line with expectations
- Exports the key in growth outlook
- Irish consumer spending abroad is now material
“Following data revisions, the Irish economy’s performance over the past five years was even stronger than originally thought; growth averaged 5.5% a year, and is now put at 6% in 2007. This makes the pace of the current slowdown all the more remarkable, with negative GDP growth recorded in the first quarter of 2008, although GNP did stay positive, if marginally so”, according to Bank of Ireland’s Quarterly Economic Outlook published today, Friday 11 July 2008.
Commenting, Dr Dan McLaughlin, Group Chief Economist, Bank of Ireland said: “A fall in house completions was a prime factor but not unexpected and it was the performance of some of the other components of growth that surprised. In that sense everything that could go wrong for the Irish economy has gone wrong – the credit crunch is now almost a year old, oil prices rose from $100 to $145 in the three months to July, the Irish equity market has fallen 30% year to date, the ECB has raised rates despite slowing activity in Europe, and sterling and the dollar have remained weak. Business and consumer confidence has crumbled in the face of this barrage, resulting in a sharp fall in non-residential capital spending by the private sector and a marked slowdown in consumer spending. Indeed, the impact of the latter is even more pronounced for Irish retailers, as the foreign spend of Irish residents is now material and impacting the macro data, having risen by 30% in the first quarter, against a 2% rise in spending by tourists coming to Ireland.
“The new data shows that the economy slowed rapidly in 2007 following a very strong first quarter, with GDP growing by just 0.7% on a seasonally adjusted basis in the second half of the year. This decline in GDP was a surprise to the consensus view and our own. Residential construction was a factor, with house-building down 30%. Home improvements rose as expected by just shy of 10% but other building and construction fell by 3.8% or by over 15% when land transfers are included. This left total building and construction 21% down on the year. Consumer spending also slowed appreciably in the first quarter to 3.5% from 5.4% in the previous quarter and is now likely to be weaker than we envisaged. One factor is inflation, which thanks in the main to food and energy, has remained stubbornly high, thus eroding real incomes. The savings ratio may also rise given the uncertain economic backdrop and we expect real spending growth of 2.5% for the year as a whole, from 6.3% last year.
“Exports dominate Irish GDP, (a 1% rise would offset a 9% fall in house completions) and the sudden slowing in service exports is the other unexpected development in the first quarter, given the consistent double digit growth seen in recent years. Moreover, the path of external trade will determine whether GDP growth for the year will be positive or negative – we now forecast a flat reading. Irish incomes may grow albeit marginally as GNP growth is forecast to be positive, reflecting a projected fall in multinationals profits. Employment growth looks set to decelerate against this backdrop, from the 54,000 recorded in the first quarter to an average of 25,000 for the year as a whole, leaving the average unemployment rate of 5.8% and above 6% by the year-end.
“These forecasts are obviously clouded with uncertainty – oil prices, ECB policy, the persistence of the credit crunch, the shape of a US recovery, if any in the near term, and the outlook for the US dollar are just some of the facts that will impact on Irish consumers and business in the coming months, and make any projects for 2009 subject to more caveats than usual. Our view is that Irish house completions will not fall forever, and at some stage will cease to become a significant negative for growth.
“As the risks to any forecast are unusually high in the current environment, house completions will become less significant (down 7.5% of GDP in the first quarter and likely to be below 6% by Q4) and the other international headwinds battering the Irish economy will presumably die down eventually. Consequently, GDP growth may pick up next year, albeit to only 1.5% in the absence of a substantial fall in oil prices and interest rates, with a similar figure for GNP. Inflation too is forecast to decline, after remaining stubbornly high at an average of 4.5% in 2008. The exchequer finances have not remained immune from the economy’s travails, and the Government will have to trim the growth in current spending to about 4% in 2009 if it is to maintain capital at this year’s level and keep the fiscal deficit before 3% of GDP.
“A fall in oil prices and lower interest rates would lead to stronger growth than forecast, but neither of these is guaranteed”, concluded Dr Dan McLaughlin”.
View a full copy of Dr Dan McLaughlin’s Quarterly Economic Outlooks (PDF Doc, 115 KB)