Purse strings to tighten as rising costs dampen growth – NERI
PERSONAL spending will contract again this year and remain flat in 2014 as household budgets remain under strain, the trade union supported Nevin Economic Research Institute (NERI) has said.
The body forecasts that consumption will fall by 0.4pc this year and remain stagnant at 0pc next year, although the economy will grow by 1pc and 1.2pc respectively.
NERI blamed living costs, declines in wages and the introduction and increases in costs such as the property tax for the weak figures.
"Indications from retail turnover figures and Exchequer VAT returns suggest that reductions in spending is one of the routes that households have adopted to absorb these direct and indirect living-cost increases," the body said in its autumn economic review.
"As the major component of the domestic economy, this sustained weakness in personal consumption weighs heavily against greater activity within the domestic economy."
NERI sees depressed but positive GDP growth this year, before reaching 3pc in 2016.
Employment will rise by 1.4pc this year, and rise to 1.7pc in 2014 and 2.2pc in 2015.
The national debt will peak in 2013 as a percentage of GDP at 123.6pc.
The think-tank called for a €2bn adjustment in the budget instead of €3.1bn, with the saving on the promissory note used to reduce the budget's scale.
NERI said this would bring the budget deficit to 4.3pc, compared with the 5.1pc target. It also called for an investment stimulus to counteract the negative impact of the budgetary adjustment on the economy.
"The remaining adjustment should be re-orientated towards taxation measures with the only expenditure cuts being those already agreed and announced under the two public sector wage agreements," NERI said.
Meanwhile, stockbroker Investec said the economy remains on track but more "heavy lifting" needs to be done to reduce the shortfall in public spending.
In its latest economy monitor, the finance house said it was keeping its earlier forecasts that the Irish economy would grow by 0.7pc this year, improving to 2.1pc in 2014.
It said that the most encouraging recent development is the improvement in the jobs market.
"Broadly speaking, Ireland's public finances continue to trend in the right direction, but more heavy lifting remains to be done to get the deficit to the target of sub-3pc of GDP by 2015," Investec economist Philip O'Sullivan said.
It said that the headline statistics on trade continue to be impacted by the patent cliff in the pharmaceutical sector.
On the consumer side, the bank said that muted inflation continues to provide respite, while the introduction of the 132 registration plate and better weather saw retail sales volumes increase in July.
"While the headline Residential Property Price Index points to improvement, with a second successive annual rise posted in July, this masks a 'two tier' market, with Dublin and its commuter belt significantly outperforming the rest of the country," the bank also said.