Irish economy contracts in face of three shocks according to Bank of Ireland’s Quarterly Economic Outlook
The Irish economy has been hit by three shocks, one well-flagged but the other two unexpected at least in their degree of severity, according to Bank of Ireland’s Quarterly Economic Outlook published today, Thursday 30 October 2008.
- GDP likely to fall again in 2009
- Unemployment to exceed 7%
- First decline in national income in 25 years as economy contracts by 1.6%
- Falling inflation and sharply lower rates may offer some respite
The Irish economy has been hit by three shocks, one well-flagged but the other two unexpected at least in their degree of severity, according to Bank of Ireland’s Quarterly Economic Outlook published today, Thursday 30 October 2008.
Commenting, Dr Dan McLaughlin, Group Chief Economist, Bank of Ireland said: “The first was the housing correction, which precipitated a 30% fall in house completions over the first half of the year, and an 18% fall in total construction output. The only saving grace, albeit partial, is that residential constructions share of GDP is falling rapidly, so any given percentage fall will have a lesser impact on national income – house building accounted for 9.3% of GDP in 2007 but had fallen to 6.5% by the second quarter of 2008, and is likely to end the year well below 5%.
“The second shock was the oil spike over the first half of 2008, which kept inflation high and prevented the type of easing in monetary policy normally seen in a cyclical slowdown. Indeed, interest rates had actually risen substantially as a consequence of a third shock – the global credit crunch. Of course, Ireland is not unique in this regard, as it now appears that global growth is slowing sharply, with the US, UK and the Euro zone all in recession. The net result is that the Irish economy will contract by 1.6% this year, its first decline in national income in 25 years, with net exports providing the only substantial support to activity.
“The outlook for 2009 is surrounded by more uncertainty than usual, given the degree of dislocation seen in financial and credit markets, but a further decline in Irish output seems the most realistic assessment at this juncture. A further sharp fall in construction spending looks inevitable given forward indicators of house building, and household income will be squeezed by lower wage growth, falling employment and a higher tax burden.
“There are two positives however, which may eventually help to stabilise activity and ultimately restore some confidence. The first is inflation, which was likely to drift lower but may fall sharply now in the wake of the recent plunge in commodity prices, including oil. The second is interest rates, as there appears little reason now for the ECB not to cut rates aggressively in the face of falling euro zone output. Rates fell to 2% in the last cyclical downturn and this appears a reasonable target this time around, with Irish inflation also likely to fall to around that level by mid-2009, on the assumption that oil prices do not rebound aggressively. Under normal circumstances, the combination of falling inflation and lower interest rates is a recipe for recovery, although market events of late confirm that this cycle is very far removed from anything experienced in recent memory.
“It seems clear from a range of more recent economic releases that employment probably fell in the second half of the year, and we now expect zero job creation on average in 2008, with an average 30,000 fall projected in 2009. Labour force growth has slowed in response to the deterioration in demand but unemployment has risen and is set to average 5.7% this year and over 7% next, hence moving the Irish economy away from full employment for the first time in a decade”, concluded Dr Dan McLaughlin.
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