Chief Economist of the Bank of Ireland, Dr Dan McLaughlin said that the driving force behind this round of 'cyclical slowdown' is the fall in residential construction with house completions set to decline to 50,000 this year from over 78,000 in 2007, before recovering in 2009.
"This rapid supply response by the building sector is ultimately positive for the housing market it is negative for GDP, knocking 1.3 percentage points off the average growth rate in 2008.
"State spending on non-residential construction, which is projected to rise by over 10%, will provide only a partial offset, with the result that construction output as a whole is forecast to decline by over 5%," Dr McLaughlin said.
The bank report predicted that housing construction will fall from 9.2% of GDP to 7.7% based on these forecasts, as the other components of GDP are set to grow, albeit at a more modest pace than of late.
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Consumer spending is forecast to increase by 4% in real terms, from 5.4% last year, in response to slower growth in household disposable income. This in turn will lead to a deceleration in employment creation and a mild easing in wage growth; employment growth will average 40,000, with job losses in construction offset by further gains in the service sector, and earnings will rise by 4.7% from 5.3% in 2007.
Exports are forecast to grow by 5%, following an 8.2% rise in 2007, with the slower pace of expansion reflecting the euro's appreciation and weaker growth in Ireland's major export markets.
"The global economy has proved resilient, despite the weakness of the US economy, but this has also pushed up commodity prices, including food and energy, preventing a more rapid deceleration in inflation than one would normally see at this stage of the cycle.
"Despite this we still expect CPI inflation to fall, averaging 3.6% in 2008 from 4.9% last year. This will provide some support for real incomes, and we envisage a half point cut in ECB rates, although the recent spike in headline inflation clouds the timing issue.
"The impact of the turbulence seen in financial markets since last August also adds to the uncertainty and provides a downside risk. The global supply of credit may also be curtailed for a time and, as a result, we now expect a less rapid recovery in 2009 with growth set to pick up to 4%.
"Any period of sub-trend growth is likely to adversely impact Government finances and 2008 is unlikely to be an exception; we expect a €1bn shortfall in tax receipts relative to Budget projections, giving rise to a €2.8bn General Government Deficit. The latter is equivalent to 1.4% of GDP, to put it in context, and as such is in line with the EU average," Dr McLaughlin said.
(VB/JM)
