The Irish economy is extremely weak and will slip into recession this year, according to a report published this morning from NCB stockbrokers.
In its third-quarter outlook NCB said gross domestic product (GDP) will contract 1.6 per cent this year and gross national product (GNP) will drop 1 per cent.
The Irish economy is labouring under a domestic housing market collapse and external shocks including the credit crunch, commodity inflation and strong euro, the report found. This combination is pushing the economy into recession.
These factors would also swell the numbers out of work with NCB predicting unemployment to increase from 5.8 per cent this year to 6.7 per cent in 2009.
The quality of employment was also changing with part-time posts accounting for two-thirds of new jobs in the first quarter, the highest proportion on record began.
According to NCB there are 289,000 unoccupied houses across the country and while not all are adjudged for sale, the report estimates there is a 12-month supply of unsold new homes on the market.
This oversupply means new house completions is likely to fall to 45,000 this year and just 30,000 next year.
The fall-off in demand and restrictions on accessing mortgage credit has led NCB to forecast a drop in real house prices of between 33 and 40 per cent from highs of January 2007.
Although weakening global economic conditions were likely to ease inflationary pressures – with NCB predicting oil prices will “self-correct” – the report found little expectation of an ECB rate cut until mid-2009.
NCB expects two rate cuts next year to bring ECB interest rates to 3.75 per cent.
Brian Devine, NCB economist, said the ECB’s policy coupled with the credit crunch was “placing undue pressure on household budgets, inhibiting consumption growth and raising the prospect of accelerating impairment charges”.
He said weakness in some of Ireland’s main export markets meant external demand for goods and services will be weaker over the next 18 months.
“Approximately 33 per cent of Irish services exports go to euro zone countries. The US and UK are our next two biggest markets . . . No more than 16 per cent of Ireland’s total exports are destined to the booming Asian and Brazil, Russia, India, and China markets,” he said.
The services sector trade deficit rose to almost €1.5 billion in the first quarter which was “disappointing” because exports from this sector had been expected to lift the economy.
NCB now expects exports to grow 2 per cent this year and 2.9 per cent in 2009, which is sharply lower than the 6.8 per cent increase recorded in 2007.
Looking forward Mr Devine expects flat GDP growth in 2009 while GNP will again contract, falling 0.4 per cent.
Despite the current difficulties Ireland remains an attractive destination for investment, the report found, adding that the demographic factors which underpinned economic growth in recent years “are likely to reassert themselves once the current phase” has passed.
