Quarterly Economic Commentary Summer 2007

Quarterly Economic Commentary Summer 2007

Embargo: 00:01 a.m. Tuesday 3 July 2007

Dr. Alan Barrett, Dr. Ide Kearney, Martin O'Brien

Some of the main findings of the analysis include:

• We expect a moderation in the pace of economic growth in 2007, with real GNP growth of 4.8 per cent. Growth in consumer expenditure is anticipated to slow in 2008, following a strong SSIA-fuelled performance in 2007. This slowdown contributes to our forecast of a further reduction in real GNP growth next year, with growth of 3.7 per cent anticipated.
  
• While these rates of growth are lower than that experienced in 2006, they should be seen as a return to sustainable rates.
  
• Housing investment is expected to fall by 4.7 per cent in 2007 and by 6.1 per cent in 2008.
  
• The slowdown in economic growth will impact on the public finances, with growth in current revenues halving in 2007 relative to 2006. Our forecast for the Exchequer Balance shows a deficit of €1 billion in 2008, a deterioration of €3.3 billion on 2006.
  
• The trade balance continues to decrease as the growth in imports is expected to outstrip that of exports in 2007 and 2008, despite a favourable international setting. This contributes to the current account deficit widening to over 5 per cent of GNP in 2008.
  
• We expect employment growth of 2.9 per cent in 2007, slowing to 1.2 per cent in 2008 driven by a deceleration in construction sector employment growth. Net immigration is anticipated to fall to 50,000 in 2007 and 25,000 in 2008. Our projections imply an unemployment rate of 5 per cent in 2008.

In our General Assessment of the economy, we look at the challenges facing the economy which is now entering a stage of transition as the housing boom ends.

• As the housing boom comes to an end, the economy must move resources to other areas of economic activity, such that the transition is as smooth as possible in terms of output and employment. We are optimistic that a smooth transition will occur and this is reflected in our forecasts for services and industry growth. However, if the current high rate of CPI inflation feeds into excessive wage demands, this could endanger a smooth transition.
  
• The scope for Government policy to assist a smooth transition is limited in the short term. This is because wage flexibility will be a crucial factor in avoiding a serious downturn and because the government has limited control over this element of the economy.
  

Note: There are two Special Articles in this Quarterly Economic Commentary, as follows:

1. "On the Likely Extent of Falls in Irish House Prices", by Prof. Morgan Kelly, UCD School of Economics.
2. "Valuing Ireland's Pension System", by Dr. Shane Whelan, UCD School of Mathematical Sciences.