Tuesday 21 October 2014

We blew the boom

Published 24/06/2008 | 00:00

This brand is Ireland: A shop window display tells a story of discounts, the economic outlook
depends on how we weather the gathering storm

IRELAND will experience its first recession in more than two decades this year -- as the Government was accused of 'blowing' cash from the building and property booms.

In a devastating economic analysis, the Economic and Social Research Institute (ESRI) forecast the first recession in the Irish economy since 1983. Outlining gloomy prospects for the economy over the next few years, the ESRI said output of goods and services will fall this year -- an Irish definition of recession.

Emigration will return, with a 20,000 outflow next year needed to stop unemployment going through 8pc, it said.

Meanwhile, public finances will plunge into the red, and next year will burst through EU limits on borrowing, sparking potential sanctions, according to the influential ESRI analysis.

The main culprit is still the collapse in house construction, which has plunged from 75,000 units last year to just 30,000 next year. This fall is so serious, it wipes out all the growth in the rest of the economy.

In fact, the ESRI is optimistic about the rest of the economy, especially exports, although these will not be strong enough to prevent recession.

Senior ESRI researcher Alan Barrett admitted this was as much "hope as expectation" and there is a risk that the economy will do worse than forecast.

Dr Barrett said a €10bn swing in the public finances was a failure of government policy.

"Everyone knows the downturn in the public finances is because government blew the finances from the boom which everybody knew would be temporary," he said.

The reason for the much worse outlook than in the last ESRI report three months ago is personal spending.

The economists believe consumers will seriously cut back as the downturn unfolds and energy and food prices stay high.

"All the indicators point to very low consumption growth in 2008, with retail sales down more than 3pc in April," said researcher Ide Kearney.

"We expect consumption growth to slow to 1pc in 2008 and recover only to 2pc in 2009."

With personal consumption making up two-thirds of the economy, and house-building having contributed more than a tenth, the effect of both is a fall in tax revenues and an "explosion" in government deficits.

The ESRI expects tax revenues to be over €3bn below government targets this year. Even by next year, taxes will bring in less than they did in 2007.

The Government will breach EU rules on borrowing by almost €2bn next year -- even if it manages to get the growth in day-to-day spending down to 6.6pc, from this year's planned 9.3pc increase.

If this happens the Government will be obliged to present the EU Commission with a plan to return the deficit below the permitted 3pc of output (GDP). Dr Barrett believes that something close to a pay freeze in the public sector would be needed if the Government is to get the growth in public spending down to necessary levels.

Despite the rise in borrowing, the ESRI believes the Government should continue with the €7bn-a-year National Development Plan.

"The EU rules should not be seen as a constraint in a particular year. There should be a re-evaluation of the plan, but where a project is worthwhile the money should be spent," Dr Barrett said.

Even if the economy recovers as forecast, the pressure on the public finances will remain. "There may have to be more spending cuts or tax rises in 2010," Dr Barrett said. "It will not just be a question of cutting down the rate of growth in spending."

lThe European Central Bank's dilemma over interest rates deepened yesterday as new figures pointed to a "toxic cocktail" of stagnant growth and spiralling inflation.

European Central Bank president Jean-Claude Trichet hinted this month that borrowing costs would rise to control inflation, which has soared to a record 3.7pc.

However, there was growing speculation that the ECB may keep rates at 4pc at its next rate meeting after European manufacturing and service companies reported declining activity.

Two decades and we're back to where we began

1987

Unemployment stood at 17.5pc, inflation averaged 12pc and emigration was at its highest level since the 1950s.

Finance Minister Ray McSharry implements a ruthless cutting of State spending, earning him the nickname 'Mac the Knife'.

1990

Ireland's participation in the 1990 World Cup in Italy is seen by many commentators as crucial in restoring the nation's pride.

1992

Taoiseach Albert Reynolds secures structural grants worth IR£6bn from the EU, providing for increased investment in education and infrastructure.

The Maastricht Treaty of the European Union, which paves the way for the monetary union and the euro, is signed.

1993

The Irish pound is devalued by 10pc, giving a huge boost to competitiveness.

Unemployment rate stands at 15.7pc and GNP growth at 3pc.

1994-1997

In 1994, the real beginning of the Celtic Tiger is marked, and the rainbow coalition of Fine Gael, Labour and the Democratic Left assumes power.

Ruairi Quinn becomes the first Finance Minister since the 1960s to announce a budget surplus.

In 1997, a Fianna Fail-PD government comes to power and new Finance Minister Charlie McCreevy pursues a policy of tax cuts.

1999

Ireland joins the euro, allowing interest rates to fall from 7pc to 3pc.

2001

The global economic downturn affects the Celtic Tiger, with growth falling through 2001 and 2002 to a level of 2pc.

2004-2007

The economy shows signs of recovery, as does the IT sector, with many dubbing the period from 2003 until 2007 'Celtic Tiger Mark II'. Growth averages 6pc.

The economy is boosted as the construction industry experiences unprecedented growth.

2008

The construction industry experiences severe slowdown. House prices fall an estimated 15pc and the Live Register soars past the 200,000 mark.

The ESRI forecasts Ireland will experience its first recession since 1986.

Fiach Kelly

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