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| Irish GNP (Gross National Product) 1948 - 2010
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Irish Economy 2009: Ulster Bank economists Pat McArdle and Lynsey Clemenger say in a report today, that following an estimated contraction of 2.3% in 2008, GNP is forecast to fall by 7.9% in 2009. GNP is their preferred measure of growth because it excludes profits of multinationals which accrue to non-residents, and includes profits earned abroad by Irish residents. Their most recent 2009 GNP estimate compares with a forecast contraction of 4% in our November Quarterly. GNP is forecast to fall by 3.4% in 2010.
The economists say, there are a number of reasons for the downward revision. Firstly, the credit crisis has exacerbated and prolonged the decline in the property market. The domestic property correction is forecast to deduct 5 percentage points from growth in 2009. In its absence, GNP would still contract, but by a more modest 2.8%. The second major negative influence on their 2009 forecasts is consumer spending. Though inflation is set to fall sharply, (from 4.1% in 2008 to minus 4.0% in 2009) boosting the ability to spend, the reality of continuing job losses will cause consumers to reduce spending. Those who do not loose their jobs are reacting to uncertainty by curbing spending in favour of precautionary savings. As consumer spending accounts for about 60% of total GNP, the impact is severe, and explains a good deal of the change in the forecast. Thirdly, the likelihood of a significant fiscal contraction between now and 2013 – with the Government taking about 2 percentage points out of the economy each year – adds to the negative influences and pushes out the timing and extent of the eventual recovery.
Finally, the credit crunch is impacting those businesses that have a demand for credit.
Also today, Central Bank Governor John Hurley said the economy will contract by 6% this year with a similar fall likely in the level of employment.
He was appearing at the Joint Oireachtas Committee meeting on Economic Regulatory Affairs today. In January, the Central Bank had predicted that the economy would contract by 4.7% in 2009.
Hurley said the exceptionally unfavourable global economic and financial conditions were making the already very difficult domestic situation even worse.
The Ulster Bank economists' summary of their Quarterly Report:
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Global growth prospects have deteriorated sharply since our November Quarterly, and the timing and extent of the recovery is subject to considerable uncertainty.
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GNP is now forecast to contract by 7.9% in 2009, compared with our previous estimate of minus 4%. This downward revision reflects a sharp contraction in two key areas, namely consumer spending and investment, driven by a negative employment outlook and a very significant fiscal contraction.
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We expect GNP tofall by a further 3.4% in 2010, as non-residential investment weakens further and ongoing job losses keep spending subdued. That is, we now forecast a three-year recession, with GNP set to fall by a total of almost 14% over the period 2008-2010.
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The recovery, when it happens, will likely be export led, and will follow recovery in our main trading partners.
Domestic factors will further add to the decline…
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Housing remains the main drag on growth this year, subtracting some 4.3 percentage points from GNP, but non-residential construction and machinery are also contributing to the decline. Non-residential investment will eventually replace housing as the main negative for total investment activity, which is set to fall by 28% in 2009 and by a further 9% in 2010.
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We have pared back our house completions forecasts to 18,500 this year and 15,000 in 2010, but housing essentially ceases to subtract from growth next year. Continued weakness in the residential property market means that house prices will fall by an estimated 40% from peak to trough.
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The outlook for consumer spending has worsened significantly, and we now forecast a decline of 6.5% this year. The main driver here is the more pronounced level of job losses.
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Consumer spending is expected to fall by a further 5.0% in 2010, as the employment situation continues to weaken. In 2010, the falloff in consumer spending will subtract almost 3 percentage points from growth, with investment taking away less than 2 percentage points - a reversal of the pattern in the preceding two years.
Fiscal situation to worsen as unemployment soars and taxes undershoot…
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Unemployment is set to hit 14% by the end of 2009, up from 7.7% in 2008, and the highest rate since 1989. This forecast assumes 220,000 job losses this year, more than half of them in services and the remainder split between construction and manufacturing. We expect a further 100,000 job losses next year, and an unemployment rate of 16% by end 2010.
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The projected sharp rise in unemployment and fall in tax revenue will put severe pressure on the already strained public finances. The extent of the deterioration in the fiscal situation is evident from our forecast rise in the government deficit to 11% of GDP this year, the largest in the Euro area.
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The upcoming emergency Budget will likely look for €4 billion in savings, via a combination of spending cuts and tax hikes. This will be difficult to achieve and we estimate that the eventual deficit will still overshoot the 9.5% target, by 1.5 percentage points.
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The medium-term fiscal outlook is clearly dependent on the degree of success the Government has in reaching the 2009 target. The figures published in early January proposed a profile that would bring the General Government Deficit below 3% by 2013. This envisaged further pain in the form of corrective measures of the order of 2% of GDP in both 2010 and 2011, declining towards 1.5% in 2013. This will be a major negative for growth in coming years.
Deflation has materialised in 2009, with zero inflation in 2010…
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As flagged in our November quarterly, the economy will experience deflation in 2009, for the first time since 1946. The extent of the decline in prices is even greater than we previously expected, with the CPI now set to fall by 4.0% this year.
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This reflects large falls in mortgage rates, supplemented by declines in energy and food prices.
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HICP (Harmonised Index of Consumer Prices), a better measure of core inflation, is forecast to fall by 1.1% this year, evidence that deflationary forces are becoming more widespread.
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Looking forward, both the CPI and HICP rates will remain low in 2010, with the former flat and the latter rising by a mere 0.4%. The risks to these forecasts lie to the downside.
