Growth to plummet as economy slows
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Friday March 14 2008
WE are facing the lowest growth rate in 20 years -- if we are lucky -- the Economic and Social Research Institute (ESRI) forecasts today.
This is the third time in a row that the institute has slashed the growth forecast in its quarterly review.
As the global situation worsens, the euro rises and energy prices soar, the ESRI puts the growth in national income (GNP) at just 1.6pc in real terms this year -- down from 2.3pc in its December forecast.
As a result, the ESRI expects unemployment to rise from around 5pc to 6pc this year, and peak at 6.2pc next year.
That would be the biggest jobless total in 10 years.
Such an outcome will expose weaknesses in the public finances, largely caused by last year's huge increase in government spending, the ESRI says. Even though it forecasts that growth will improve to 3.5pc in 2009, the government deficit is likely to increase further, reaching more than €4bn.
Senior researcher Alan Barrett said all the indicators had moved the wrong direction since the last forecast. And there was a stronger chance that they would continue to worsen beyond the forecast, rather than being better.
"The main reason for lower growth is still the fall in house building, but this time there are no helpful offsets. Everything else that has happened has been negative," he said.
The forecast came before yesterday's figures showing an unexpected rise in inflation, with food prices going up at the fastest pace in a quarter of a century. The ESRI predicts inflation averaging 3.4pc this year; but after yesterday's numbers, other analysts were projecting a 3.7-4pc rise in prices.
The ESRI is not the first to predict 6pc unemployment by the end of the year. It sees no growth in jobs this year, but an extra 23,000 at work in 2009. It expects the number of immigrants to halve to around 60,000 a year; but emigration, including foreigners, will increase from around 30,000 a year to 50,000.
"The survey of employers by the ESRI and FAS shows their hiring intentions at a five-year low," researcher Martin O'Brien said. "But with wage growth falling to 3.5pc, the loss of competitiveness will come to a halt, although it won't improve."
The ESRI is relying on continued strong exports from services like banking and computing to deliver the growth, but admits that this is a very uncertain area.
"There is not much data on services. We might be wrong, and if we are, the implications could be quite severe," Dr Barrett said. "We are predicting €8bn growth in services exports next year, and total growth of €8.5bn in the economy, so that shows how important they have become. The risks are on the downside, because it is very hard to see where there could be surprises on the upside."
The forecasts assumes a 20pc rise in oil prices this year, and a 10pc drop next year, along with interest-rate cuts of half a percentage point this autumn.
Better global conditions next year will see national income rise by 3pc. That would give average growth of 3pc over the three years of the 'downturn', 2007-09, which would be widely regarded as a soft landing. However, the ESRI said the public finances would remain under pressure.
Even if the Government meets its targets this year, and cuts the growth in current spending to 7.5pc next year, the general government deficit will top €4bn, or 2pc of output (GDP) in 2009. Exchequer borrowing to cover central government will reach €7.5bn.
Debt
The national debt, which had been 25pc of GDP in 2006 would approach 30pc. The overall change in the public finances since 2006 would be €10bn.
"We don't like saying 'I told you so,' but we warned of the consequences of the 13pc rise in spending last year," Dr Barrett said. "If 2007 hadn't happened, the Government would not be in this position on the public finances. Now is not the time to slam on the brakes, with the economy slowing anyway, but it is something they will have to deal with in coming years."
- Brendan Keenan Group Business Editor
