• Pat McArdle, Chief Economist, Ulster Bank

  Both the domestic and international economic outlooks have deteriorated, causing Ulster Bank to lower its growth forecast to 0.5% from 2% in the last quarterly…
• Growth is still forecast to rebound to 2.0% in 2009…
• House prices have further to fall in coming months, however, we expect a levelling off in the second half of 2008, leaving them down 5% by year end…
• Exports will be a critical determinant of growth this year, given that domestic demand will contract. We forecast that net exports will account for all GNP growth in 2008 as imports fall off…
• Ulster Bank has made only modest downward adjustments to its new house completions forecasts (42,500) but the outlook for commercial building has deteriorated and the construction slowdown will extend into 2009…
• Rising interest rates, reduced credit availability, deteriorating consumer confidence and slower employment growth will weigh on consumers, causing a lowering of the consumer spending forecast from 3% to 2%...
• The labour market has been sustained by rising part-time and self-employment, but is set to slow sharply due to job losses in construction and slower growth elsewhere; however employment growth will remain positive at 0.5% this year…
• Inflation will moderate in 2008, reflecting lower contributions from mortgage interest rates and energy prices. A forecast of 4.4% assumes that food prices will continue to rise for some time, and that energy prices remain at current elevated levels…
• Inflation is still set to decline sharply in 2009, to below 3%...
• Tax revenue will again disappoint in 2008 and spending will also be under pressure. The 2008 Budget deficit may reach 2%, well above the 0.9% Budget forecast but still comfortably below the EU 3% limit…

Ulster Bank says in its Quarterly Economic Outlook (not available online) that the prospects for the Irish economy remains favourable in the medium term, albeit that growth is set to slow sharply this year. GNP growth in 2007 was 4.5% but is forecast at 0.5% in 2008. A rebound to 2% in 2009 is predicted.

Since the last quarterly, consensus 2008 growth forecasts have been lowered as follows: US 2% to 1.3%, UK 1.8% to 1.6%, Eurozone 1.8% to 1.5% and Asia Pacific 5% to 4.7%. The dollar and sterling have each fallen by 5% making it more difficult to export, while oil prices are up 20%.

In addition, market turmoil has become more virulent, at least in so far as interbank interest rates and cost of funds is concerned. True, it looks as if the worst of the crisis, in a strictly financial sense, is behind us. However, banks and economists are still struggling with the economic consequences of higher rates and reduced credit availability which look set to continue into the second half of 2008, if not into 2009. Housing starts were also exceptionally weak in the first three months – a good omen for house prices but not for GNP – and consumer confidence has plummeted.

While most areas of activity are contributing to the lower growth outlook, the key factor in the turnaround is still investment, which is driven by housing, and which is subtracting 4.5 percentage points from growth this year. Investment should again turn positive in 2009 when new house completions level off. Commercial construction is expected to hold up well this year but to weaken in 2009.

With domestic demand in decline, net exports will be the biggest contributor to growth this year as imports fall off sharply.

Consumer spending was buoyant in 2007, boosted by strong job creation, an expansionary Budget and a limited SSIA effect. A deceleration to 2% is forecast for 2008, reflecting slower employment growth (0.5%) and weak consumer confidence. Wage increases of 4.75% will be offset by higher savings in the face of uncertainty and lower LTV (loan to value) ratios on offer from banks.

Inflation was elevated in 2007 when the average CPI rise was 4.9%. The HICP, which excludes interest rates, was 2.8%, lower but still well above the EU13 2.1% average. The 2008 forecast is 4.4% CPI and 3.5% HICP. The 2009 outlook is for a sharp fall in the CPI to 2.8%.

The 2007 budget surplus was depleted by weaker revenue growth as taxes from housing fell but remained in the black. The forecast 2008 Budget deficit is likely to overshoot to 2% as housing weakens further, the economy slows and cyclical spending rises. This will still be comfortably below the EU 3% limit.

House prices fell by 7.3% in the year to December 2007. Ulster Bank expects them to fall further but to level off in the second half of 2008, leaving them down 5% by year end. Housing affordability has improved sharply as the rise in mortgage rates has tailed off, house prices are falling, stamp duty has been lowered, income tax mortgage allowances increased and wages are rising. Affordability is now back at 2004 levels – it is confidence, not affordability, which is now delaying the recovery.

Housing supply has also been sharply curtailed but confidence has yet to improve. Ulster expects this to happen later this year. Forecasts for new house completions have been lowered to 42,500 in 2008 and 2009. The reduction in the 2009 forecast to 42,500 reflects the need to work off the overhang of new houses before completions return to their underlying rate of about 50,000 per annum.