Will 2008 be a bad year for the Irish economy?
NO:
Today is the traditional day to take stock. In that regard, the economy's stock is in good order with another year behind it of over 5 per cent growth in real output. However, this rate of economic growth is slowing substantially into the first half of 2008, primarily as a result of the significant slowdown in housing activity. Critically, other sectors of the economy should continue to perform strongly next year and, given the right circumstances both internationally and nationally, will take up some of the slack arising from the housing slowdown.
Despite the persistent uncertainty around the global financial credit crunch, the world economy should have another strong growth year in 2008 even if the US approaches stagnation. Of the 43 economies covered weekly by the Economist, all are forecast to grow in real terms next year with rates from a low of 1.5 per cent for Denmark to 9.9 per cent for China. The OECD actually expects the rate of growth in world trade to increase to 8 per cent next year from 7.1 per cent in 2007.
As a trading nation, this is a fertile ground for Irish growth to resume in a sustainable export-oriented manner as we rebalance away from an over-dependence on domestic demand growth factors.
Competitiveness and its restoration must be the over-riding domestic objective of 2008 for all social partners. As we square up to the new year, the competitiveness combination is a jab of cost containment with a punch of productivity improvement.
Regardless of what the international scenario may hold, this is the domestic imperative.
At this stage we have a reasonably good idea of what will happen to housing activity in 2008. We know from the pipeline data on housing starts that the number of new houses to be built next year will fall by at least one third. If the data on starts remains weak in the first quarter of 2008, then the fall-off in housing activity could be even greater. With residential construction now accounting for about 12 per cent of GNP, it is clear that the lower level of house completions will be a significant drag on growth. The rapid nature of the reduction in housing activity is welcome and will ultimately ensure that as output reverts to more sustainable levels, the risk of a severe correction in house prices can be avoided.
The Government's commitment to maintaining momentum in the capital investment programme through the National Development Plan will mean that increased activity in the non-residential construction sector will partly compensate for the housing slowdown. Overall, however, building and construction output in 2008 will contract. Just like the global credit crunch, the domestic correction in the residential housing market is a case of (In Macbeth's words): "If it were done when 'tis done, then 'twere well / It were done quickly." A key feature of the economy in 2007 has been the significant rebalancing which has taken place. The housing boom of the past decade led to an over-reliance on the sector for economic growth. The surge in both housing activity and prices contributed to inflationary pressures in the economy and ultimately led to a deterioration in competitiveness. With slowing housing activity levels, and an improving export performance, economic growth has been much better balanced.
The shift from the domestic sectors of the economy to the traded sectors as the main drivers of growth is likely to continue into 2008. Post-SSIA effects and the deterioration in consumer confidence will mean that consumer spending growth will soften. Nevertheless, strong demographic growth and the slight boost to real incomes delivered in the budget will mean that consumer spending growth will continue to outperform that in most other EU countries. Indeed the exceptionally strong demographics of recent years will underpin all sectors of the economy in the medium-term.
Exports of goods and services this year are set to grow at the highest rate since 2001. The strong industrial output performance has been reflected in a healthy increase in goods exports. Services exports continue to expand as Irish firms have been able to exploit the opportunities arising from the exceptionally high growth rates in world services trade. Maintaining this strong export performance in the coming years is essential if we are to preserve economic prosperity.
The slowdown in the domestic economy provides an opportunity to reduce inflationary and wage pressures. There is absolutely no justification for wages to continue growing at over double the average rate of wage growth in the euro zone. Productivity growth provides no justification for this.
The international and domestic economies face many challenges in 2008 but the possibility of a recession in Ireland is remote. The rate at which the economy will expand may be lower than in recent years but 2008 may provide the springboard for more sustainable growth into the future. And with the age-standardised mortality rate in Ireland having fallen by over 26 per cent in less than a decade there are more of us around to cheer the new year.
Danny McCoy is director of policy at Ibec, the Irish Business and Employers Confederation.
