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Irish Economy

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Irish Economic Outlook: Winter 2008

Wed, Nov 19 2008, 14:49 GMT
by Allan von Mehren

Danske Bank A/S

Overview

The Irish economy has experienced a rapid reversal of fortune over the last year. Economic growth has fallen from 6% in 2007 to expected declines of 1.5% and 2.8% in 2008 and 2009, driven by slower export growth, and continued poor consumer and investment demand. Exports will be hurt by weakness in the global economy, exacerbating the domestic slowdown already under way. A continued rise in unemployment, coupled with increased income tax announced in the Budget, will continue to dampen household spending in 2009. Finally, residential construction will contract further, with overall construction also restricted by a slowdown in commercial activity in response to a rapid fall in capital values.

Outlook

The Irish economy has experienced a rapid reversal of fortune over the past year. Economic growth has fallen from 6% in 2007 to a forecasted contraction of 1.5% in 2008, mainly due to the contraction in house building, which we expect will slump next year to one third of its 2006 peak. Although house price indices have fallen by 14% from their peak in the second half of 2006, these indicators tend to lag market activity, with the real decline probably around 25%.

With construction sector weakness now spreading to other areas of the economy, we expect unemployment to rise from 4.5% in 2007 to an average of 8% in 2009. Also, the weakness of the Government's finances has forced it into consolidating its financial position at a time when other European countries are developing programmes to stimulate economic activity.

Global economic conditions have deteriorated rapidly, with financial market turmoil since the collapse of Lehman Brothers likely to have a significant impact on the world economy. Its overall impact will be to increase the severity of the downturn which the Irish economy is likely to suffer in 2009, though it will also have the effect of shifting some of the economic pain from the domestic to the export sector. In particular, Irish households have relatively high levels of personal debt, most of which is in the form of variable rate mortgages. As such, the monetary stimulus of lower interest rates should have a greater impact in Ireland than in any other Euroland economy.

As a result of this combination of weaker consumer, investment and export demand, we expect a further contraction in the Irish economy in 2009 of around 2.8%.

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Published on  Wed, Nov 19 2008, 14:49 GMT