Think Tank Warns Of Economic Downturn

Economic Growth Said To Slow By 2008

Growth in the economy is likely to slow down by 2008 and the government needs to prepare for it in advance, the Economic and Social Research Institute (ESRI) warned this week.

The ESRI cautioned the government against a pre-election spending spree, saying such a course of action could have serious consequences if the economy, as predicted, experiences a sharp slow-down the following year.

The ESRI predicted the economy would continue to do well and grow in 2006 and 2007, but said a number of factors gave cause for concern for economic performance in 2008.

Among the most serious factors are the delayed impact of the interest rate rises imposed by the European Central Bank this year, a lessening impact of the SSIAs and a possible slowdown in government spending after the next election.

The ESRI said the government should keep enough cash in reserve to stimulate the economy in 2008, if needed.

"The Government shouldn't add to booms . . . you want fiscal authorities to have the capacity to supplement any fall-off in domestic demand," said ESRI economist Dr Alan Barrett.

"We won't have the SSIA money by 2008, we won't have the boost from any pre-election spending and the amount of house building is unsustainable by any definition," he added.

Dr Barrett argued that Government spending should act to smooth what economists refer to as the "business cycle" by being weaker in years of good economic growth and stronger in years of weaker economic growth.

Effectively keeping cash in reserve for the proverbial rainy day.

Although the ESRI has not yet made a detailed forecast for 2008, Dr Barrett predicted that the expected growth rates for 2006 and 2007 would not be sustained.

"The one thing I will say is that I bet you it will be lower," Dr Barrett said.

An "orderly roll-out" of public spending over the next three years would be necessary to prepare for a weaker growth scenario, he added.

Together with what he described as an "unsustainable" dependence on the construction sector - which was making employment vulnerable to any decline in confidence in the housing market.

Dr Barrett said that present growth was benefiting significantly from the release of SSIAs.

Almost 90% of people due to benefit from SSIAs said they intend spending the money on consumer goods.

The ESRI's latest forecasts assume that one quarter of SSIA money will be spent in the economy next year.

"That has a knock-on effect on the economy.

"You can also add in an investment effect on things like house extensions.

Some 43,000 extra SSIA jobs would be created and an extra €2 billion will flow into the Exchequer."

The disappearance however of this impact in 2008 is among the list of concerns raised by the latest ESRI commentary.

Gross domestic product (GDP) - a measure of the economy's annual output - will grow by 5.6 per cent this year and by 5.2 per cent next year, according to ESRI forecasts, while 85,000 jobs will be created this year and a further 74,000 in 2007.

It predicts that the rate of inflation will rise above 4 per cent later this year and will average 3.8 per cent over the full year.

Government spending in 2006 is expected to rise by 13 per cent.