| Click for the Finfacts Ireland Portal Homepage |

Finfacts Business News Centre

 Irish Economy
 EU Economy
 US Economy
 UK Economy
 Global Economy
 Asia Economy


How to use our RSS feed

Web Finfacts

See Search Box lower down this column for searches of Finfacts news pages. Where there may be the odd special character missing from an older page, it's a problem that developed when Interactive Tools upgraded to a new content management system.


Finfacts is Ireland's leading business information site and you are in its business news section.

We provide access to live business television and business related videos from: Bloomberg TV; The Wall Street Journal; CNBC and the Financial Times. Click image:


Finfacts Homepage

Irish Share Prices

Euribor Daily Rates

Irish Economy

Global Income Per Capita

Global Cost of Living

Irish Tax 2008

Climate Change Reports

Global News

Bloomberg News

CNN Money

Cnet Tech News


Irish Independent

Irish Times

Irish Examiner

New York Times

Financial Times

Technology News




Content Management by interactivetools.com.

News : Irish Last Updated: Apr 24, 2009 - 5:31:05 PM

ESRI says the Irish economy will experience a recession in 2008 - the first time since 1983; Dramatic slowdown will result in sharp rise in public finances deficit
By Finfacts Team
Jun 24, 2008 - 12:46:09 AM

Email this article
 Printer friendly page
The ESRI says that it has revised its forecast for house price changes in 2008 and 2009 downwards to -6.3 per cent and -1.5 per cent respectively. These forecasts are based on long-run estimates from its equation for housing demand. This equation uses its forecast numbers for income, house building, population and real interest rates to forecast the implied equilibrium house price level. The most recent estimation results, shown in Figure 5, suggest that, relative to economic fundamentals, house prices were overvalued by over 12.5 per cent in 2007. Based on the forecast house price numbers this gap closes to 0.9 per cent in 2008 and 2009. These forecasts assume an orderly correction in the market, however, prices may well overshoot on their return to equilibrium, in which case house prices could well fall further over the short term.

The ESRI - - the Economic and Social Research Institute - -  says in its latest Quarterly Economic Commentary (QEC), published today, that Ireland will experience a recession for the first time since 1983. For 2009, the Institute expects an upturn with real GNP expected to grow by 1.9 per cent and real GDP expected to grow by 2 per cent.

Consumption is expected to grow by just 1 per cent this year and by 2 per cent next year. These figures represent significant downward revisions from our last Commentary. A decline in investment of almost 15 per cent in 2008 and of 4.5 per cent in 2009 is anticipated. Exports are forecast to grow by 4.8 per cent in 2008 and by 4.4 per cent in 2009, well down on the 2007 preliminary growth figure of 8.2 per cent.

The ESRI says that the dramatic slowdown in the economy will have many implications. The deficit on the public finances is forecast to grow rapidly. On a general government basis, the Institute now expects a deficit of 2.8 per cent of GDP in 2008 and of 3.9 per cent in 2009 in the absence of budgetary intervention. Job losses will be a feature of the economy in 2008 and the rate of unemployment will rise to over 7 per cent by the end of 2008. Job gains should resume in 2009 although the rate of job losses in 2008 will be such that the numbers employed on average in 2009 will be lower than that of 2007 and 2008.

On inflation, the ESRI expects the Consumer Price Index (CPI) to average 4.5 per cent in 2008 and 3 per cent in 2009.

Dr. Alan Barrett, lead author of the QEC defines a recession as a contraction in annul growth, rather than the generally accepted US definition as as two consecutive quarters of decline in real GDP. However, the US National Bureau of Economic Research says its procedure differs from the two-quarter rule in a number of ways. First, it considers the depth as well as the duration of the decline in economic activity. Its definition includes the phrase, "a significant decline in economic activity." Second, it uses a broader array of indicators than just real GDP. One reason for this is that the GDP data are subject to considerable revision. Third, it uses monthly indicators to arrive at a monthly chronology. 


The Institute says that the forecasts presented in the Commentary include a number of striking elements. First, it is forecasting a contraction in the economy in 2008. If this proves to be accurate, it would be the first contraction on a GNP basis since 1983. Second, it is forecasting a return to net outward migration in 2009. Again, such an outcome has not been seen at a significant level since the late 1980s.Third, it is forecasting that the General Government Deficit will breach the 3 per cent mark set down in the Stability and Growth Pact. This has not happened since the SGP was agreed in 1997. These are all clearly worrying developments and thought needs to be given to how policy should be tailored to deal with the situation, the ESRI says.

The authors of the Commentary argue that any increases to public servants under the current pay round should reflect these likely developments in the private sector. While the argument will be made by public sector unions that allowance should be made for inflation, they argue that the economy generally and the public finances in particular are in a vulnerable state and that national interests would be best served through wage restraint in the public sector.

The ESRI says that it seems highly unlikely that Ireland would face any serious sanctions from the European Commission as a result of the 3 per cent threshold being breached, as long as it can be clearly demonstrated that the situation is temporary and related to particular problems in the economy that are unlikely to be repeated, and that the government has a medium-term strategy to reduce the deficit. Given that much of the current problem facing Ireland is related to the house-building contraction, a case can be made that a structural change of sorts is underway and that this process should be completed by 2010. As discussed in the recently published Medium-Term Review, there are reasons to believe that the economy will return to its medium-term growth path in that year. As we have seen in the past, higher growth is the preferred route to bringing the deficit back below the 3 per cent mark.

Given that serious sanctions are unlikely to be imposed, the ESRI says that the issue of whether dramatic efforts should be made to correct the deficit can be addressed solely with reference to the economic arguments. Generally, as severe curtailments in spending or increases in taxes in 2009 would tend to act against the economic recovery that the ESRI foresees, these should be avoided. More particularly, any moves to correct the public finances through an arbitrary slow down in the rollout of the National Development Plan should be avoided. It is crucial in this current difficult period that we do not lose sight of the need to ensure that Ireland’s infrastructure continues to be developed so that long-run growth is facilitated. However, the Institute says that projects should be prioritised by estimated rates of return and that the pursuit of value for money should remain a key objective while maintaining the planned levels of spending. A sine qua non for future prosperity is that all capital projects can be justified on a cost-benefit basis. The Institute also says that if the deficit in 2009 turned out to be larger than our current forecast corrective action would be called for.

The Commentary says that the economy is experiencing considerable difficulties right now: The forecast for the re-emergence of net outward migration is possibly the most vivid illustration of this and may give rise to comparisons with the 1980s. Given the likelihood of such comparisons, it is worthwhile stressing that the economy is better placed today to emerge from these difficulties than it was in the mid-1980s. However, a return to higher growth rates is predicated on ensuring that public expenditure is both efficiently provided and effectively managed. In such a context, a return to positive growth in 2009 and 2010, forecast both here and in the   Medium- Term Review 2008-2015, can be expected with a reasonable degree of confidence, something which could not be said in the mid-1980s.

Some of the main findings of the analysis include:

- The ESRI expects GNP to fall by 0.4 percent in real terms in 2008. This implies that Ireland will experience its first recession since 1983.

- This forecast for 2008 represents another in a series of downward revisions to our forecasts for 2008. In earlier Commentaries, the downward revisions were related to an acceleration in the construction downturn. This time, it is the revised forecast for consumption that contributes most to the overall revision. The Institute now expect consumption to grow by just 1 percent in 2008. This is a dramatic slowdown from the last three years when consumption growth has averaged over 6 percent.

- For 2009, the ESRI expects a modest upturn with GNP expected to grow by almost 2 percent.

- A number of stark implications arise from these forecasts:

>The Institute expects the General Government Deficit could be 2.8 percent of GDP in 2008 and 3.9 percent of GDP in 2009. Hence, it expects that the 3 percent deficit limit under the Euro Stability and Growth Pact will be breached in 2009.
>On average across the year, the number employed in 2009 will be lower than the corresponding number in 2007.
>It expects net outward migration to resume in 2009, at a rate of 20,000.

In the overall assessment of the economy, it looks at two issues.

- Although it appears that the 3 percent deficit limit under the Stability and Growth Pact will be breached in 2009, it argues that the required fiscal correction be spread beyond 2009. Efforts should be made to contain the deficit and to ensure value for money in public spending but the 3 percent mark should not be viewed as a binding constraint within a single year once a medium-term strategy is in place to correct the deficit.

- With unemployment on the increase, the state’s agencies with responsibility for education, training and job placement need to ensure the delivery of effective programmes to those who are likely to experience difficulties in regaining employment.

Related Articles
Related Articles

© Copyright 2009 by Finfacts.com

Top of Page

Latest Headlines
Ryanair revises up full-year profit guidance
AIB bank profitable in third quarter
Ryanair announces half-year profits up 32% to €795m
Ryanair benefits from improved customer service
Ryanair to buy 100 new Boeing 737 MAX 200
Finfacts server migration Thursday
State-owned Allied Irish Banks reports H1 2014 profit as bad loan charges plunge
Ryanair reports profit in its financial first quarter soared 152%
UK firm opens van dealership in Dublin
Ryanair reports 8% fall in full-year profit; US services to commence in 2019
Global Financial Centres Index: New York overtakes London; Dublin slips to 66 of 83 cities
Bank of Ireland reports “significant” improvement in 2013 results
Sale process of IBRC UK projects Rock and Salt completed
CRH says 2014 will be year of profit growth after reporting 2013 loss
Ryanair reports third-quarter loss
Irish Water says it saved €100m in setup costs
RSA Insurance fires two Irish executives for large loss/ accounting irregularities
Bank of Ireland will have to raise provisions by €1.4bn; AIB says it's "well capitalised"
CRH reports slightly improved third quarter
Central Bank says ownership of Newbridge Credit Union transferred to permanent tsb
Ryanair reports H1 profits rose by 1% to €602m
Dublin Web Summit: Irish Stock Exchange and NASDAQ OMX announce dual listing plan
Irish pension managed funds returned to growth during September
Dan O’Brien resigns as economics editor of The Irish Times
Central Bank says no action required on Anglo tapes revelations
Ryanair flew 9m passengers and Aer Lingus carried 1.1m in August
UK Competition Commission says Ryanair must cut Aer Lingus stake to 5%
CRH reports H1 2013 revenue dip and loss
Vodafone refunded UK after discovery of Irish tax haven deal
RBS reports half year profit; Ulster Bank posts reduced loss
Bank of Ireland cuts pretax losses in HI 2013 to €504m
Irish State-owned Allied Irish Banks reports losses of €758m in H1 2013
Service Announcement
Irish managed pension funds declined in June
VHI reports 2012 surplus of €54.3m; Health insurance made loss
Ex- Elan director says management / board "not competent to run a business"
Aer Lingus to put €140m in employees pensions fund; Ryanair apoplectic
Wednesday Newspaper Review - Irish Business News and International Stories - - May 22, 2013
Tuesday Newspaper Review - Irish Business News and International Stories - - May 21, 2013
Ryanair, Europe’s biggest low cost carrier, announced Monday record annual profits of €569m - - up 13%