IBEC review: Economy needs necessary rebalancing

IBEC’s latest Quarterly Review released today revealed that the economy to date had performed well with first half figures for GDP recorded growth of 6.7% and a solid growth in manufacturing and exports.

IBEC Chief Economist David Croughan said: “Manufacturing output in the first eight months of the year is up 7.7% on the same period of 2006 – the fastest pace since 2002. Employment, too, has grown by a healthy annual 3.9% in the first half of the year," he said.

“Irish economic growth in recent years has been overly-dependent on domestic demand and, in particular, on residential construction. Some correction was inevitable and desirable.”

He stressed, however, that the rebalancing would require careful management as it comes at a time when there is significantly increased global uncertainty, resulting from the financial turmoil arising out of the collapse of the US sub-prime mortgage market.

“It is not yet possible to know what impact these events will have on global growth; what we do know is that the global economy was in good shape prior to the financial difficulties and the OECD and the European Commission remain generally positive about the international environment," he said.

Mr Croughan predicted that Irish economic growth would slow down in the second half of the year and would remain sluggish in 2008 as there were clear indicators already pointing to a quite sharp slowdown in the second half of the year, which will persist throughout 2008. “GDP growth, we think, will slow to just below 3.5% in 2008, though we should remind ourselves that this would still be one of the highest growth rates in the euro area,” he said.

Looking ahead to the release of the Minister for Finance’s Pre-budget Outlook, he said that the general government balance will still be in surplus at the end of the year, despite lower revenue from stamp duties, capital gains and VAT, all associated with the construction sector slowdown.

However, Exchequer revenues in 2007 will almost certainly be €1 billion below expectations, which will also lower the base for 2008. “Government’s response must be to contain growth in current expenditure rather than jeopardise essential infrastructure provision. Prudent current expenditure management in 2008 will still leave the general government balance close to zero,” he said.

“The focus of government policy must be on the completion of the infrastructure programme and support for enterprise in achieving a higher productivity performance. Additional essential capital infrastructure projects should be ready to implement if spare capacity in the construction sector does emerge,” he concluded.