Irish Economy:Ulster Bank says today that Ireland's GNP (Gross National Product) will fall by 4% in 2009, to be followed by a modest recovery in 2010. Deflation for first time since 1946 forecast in 2009 and 85,000 job losses. In a blunt and spoof-free appraisal, Ulster Bank's economists say that the government has failed to communicate the seriousness of the fiscal situation, blurring it by the complexity of the budget day decisions, and by yielding to public pressure for changes. They say that the likely 2010 deficit could be as high as €14.5 billion, instead of the €9.3 billion official forecast.
The bank says the extent of the deterioration in both the domestic and international economies since its July Quarterly Report has been shocking. Irish GNP growth is now forecast to contract by 2.8% in 2008. The downward revision primarily reflects a sharper reduction in consumer spending, which has been exacerbated by the turmoil in financial markets, fear of job losses, and the plunge in confidence.
Today's Quarterly Update, was prepared by Pat McArdle Chief Economist and economist Lynsey Clemenger
Ulster now anticipates a two-year recession, with GNP set to fall by 4% in 2009. This reflects a combination of factors, including the weaker global environment, but mainly a more severe and prolonged housing market slowdown, as well as continued deterioration in the labour market, which will prompt consumers to curb spending in favour of saving. Lower inflation and substantially lower interest rates will help, but will be overwhelmed by the other negatives.
The authors say that the timing and the extent of the recovery is subject to considerable uncertainty, but they see GNP rising modestly in 2010, by 0.3%. This reflects the expectation that the number of houses built will level off at 20,000 in 2010. Though this is still an exceptionally low level, it removes the negative impetus from housing, causing GNP to bounce. Positive growth in consumer spending, and a better export performance as the global economy improves, also contribute to the recovery.
Construction remains the key determinant of growth
-
Ulster has raised its 2008 completions forecast from 44,000 to 48,000, reflecting stronger-than-expected activity so far this year. However, exceptionally weak starts have prompted them to lower their 2009 forecast to 20,000.
-
Completions in 2010 will remain depressed at 20,000, on the grounds that the supply overhang has grown, and will therefore take longer to clear. This also reflects a lower underlying demand for housing, as immigration slows. On a more positive note, this means housing output is no longer subtracting from growth.
-
House prices are down 14% from the peak, but given the lags in reporting the economists believe the true rate of decline is greater, probably of the order of 20%. Prices have further to fall in coming months and McArdle and Clemenger predict a total fall from peak of 30%.
-
The outlook for commercial and civil activity has worsened considerably, as signalled by the Ulster Bank Construction PMI in recent months. A modest decline in non-residential construction this year is forecast, followed by a more severe contraction in 2009 as the economic slowdown and the sharp drop in commercial property prices feeds through.
Deflation in 2009 not enough to bolster consumer spending
-
The falloff in consumer spending in 2008 is greater than was originally expected, and the author now forecast a decline of 1%. The main driver here is the ongoing deterioration of the Irish labour market, which in addition to the continued negative news-flow on the domestic and international economies, in keeping consumer confidence subdued. Consumer spending is expected to fall further, by 3.0%, in 2009, as the employment situation worsens.
-
The economy will experience outright deflation in 2009, for the first time since 1946. The projected 0.5% fall in the CPI reflects a significant drop in mortgage inflation as the ECB rate cuts feed through, in addition to further falls in energy and food prices. The global slowdown will also add to the moderation. All else equal, this dramatic falloff in prices, which is a positive for disposable incomes, should bolster consumer spending -but all else is not equal.
-
Unemployment is set to average 8.5% in 2009, the highest rate since 1997. This implies 85,000 job losses next year, more than half of them in construction and the remainder split between manufacturing and services. McArdle and Clemenger say that the budget figures entail public sector job losses of the order of 11,000, as the government attempts to curb spending on pay.
No room for fiscal expansion
-
The authors say that the revised tax estimates for 2008 are still too optimistic in the context of the dramatic slowdown that has occurred, and further tax shortfalls and additional spending excesses are expected. This will push the 2008 deficit to 6% of GDP, above the government forecast of 5.5%.
-
The combination of the further deterioration in 2008 and the weaker economy in 2009 is likely to see next years budget deficit rising to €14.5 billion, or 8% of GDP, as compared with the official 6.5% forecast. Only a modest improvement, to 7.3%, is envisaged for 2010.
-
The authors say that the government has failed to communicate the seriousness of the fiscal situation, blurring it by the complexity of the budget day decisions, and by yielding to public pressure for changes. They say that the likely 2010 deficit could be as high as €14.5 billion, instead of the €9.3 billion official forecast.
-
McArdle and Clemenger say the choices are stark. Either the deficit is allowed rise or further very substantial cutbacks/tax rises will be required. Either way, there is simply no room for fiscal easing packages of the type being recommended by some economists or being contemplated in other countries. Fiscal policy is likely to be a drag on growth for the foreseeable future.
