Despite a slowdown in housing activity, the Irish Economic Outlook report published today by AIB Bank, says that prospects for much of the economy are still quite favourable.

Non-residential construction activity is expected to remain very buoyant. The bank says that it is also encouraging to see a marked pick up in Irish manufacturing output and a rebound in service exports. Global growth is expected to stay quite strong, helping exports. Net trade should make an increasingly important contribution to GDP growth in the next two years. AIB expects GDP growth to remain relatively robust at 5.0% in 2007, down from 6% in 2006.

The report, which was prepared by AIB's Chief Economist John Beggs and the AIB Economic Unit, says that housing output looks set to decline further next year, with house completions forecast at 75,000, down from an expected 82,500 this year and over 88,000 in 2006. Meanwhile, the impact of maturing SSIAs and an expansionary fiscal policy is likely to be less pronounced in 2008. Interest rates are also continuing to move higher. The bank expects a significant deceleration in consumer spending growth next year.

Overall GDP growth is forecast to slow to 3.7% in 2008 on the back of weaker growth in the three main components of domestic demand - household spending, current government expenditure and fixed investment. AIB looks for domestic spending to rise by just 2.5% next year, down from over 5% in 2006 and 2007.

A deceleration in the pace of growth in economic activity will have predictable consequences for the labour market. AIB expects the growth in employment to decelerate to 3.6% this year and 2% in 2008 from 4.4% in 2006. However, labour force growth is also projected to slow, which should help curtail the rise in unemployment. A jobless rate of 5% is forecast for next year, up from 4.4% in 2007.

AIB says that the boom in housing has come to an end but it does not expect a housing market crash or severe negative consequences for the economy. It is that it is worth noting that it expects the Irish economy to grow by 5% this year and close to 4% in 2008, despite a fall of 15% in housing completions over the two years.

The bank says that the recent stabilisation of house prices and expected fall in housing output are welcome developments as the market was in danger of becoming over extended.

The slowdown in housing should be offset to some extent by strong growth in non-residential construction activity, which had been quite weak up until last year, especially public capital spending. The new National Development Plan provides considerable additional resources for infrastructural spending. Private non-residential building activity is also growing rapidly.

Overall, then, AIB says that the slowdown in housing activity should not derail the economy. Instead, it is likely to see it move on to a more moderate growth path by 2008, with GDP forecast to rise by 3.7%. The bank says that this would still be a strong growth rate by international standards. Employment is also still forecast to grow by 2% in 2008, implying an additional 42,000 jobs, despite a contraction in employment in construction.

AIB says that it should also be borne in mind that it is looking to a slowdown in the pace of economic growth  from its very robust pace in 2006 and not a slump in activity. It says that the economy proved able to withstand the global downturn and severe contraction in the ICT sector at the start of this decade. It now expects the economy to display the same type of resilience in the face of a downturn in housing, especially given the strong global economy, notably Europe.

Irish Economic Outlook report says that inflation has picked up a lot since the start of last year, especially the headline CPI rate, which has been running at around 5% in recent months, double its level at end 2005. Much of the rise, though, is due to increased mortgage costs. The rise in the EC measure of Irish inflation, the HICP rate, which excludes mortgage interest, has been much less pronounced. It is forecast to average 2.7% this year, the same as in 2006, but this is still close to 1% above the inflation rate in the eurozone.

The report says that it is very important that Ireland keeps domestically induced inflation under control. The errors made at the start of this decade, when sharp hikes in indirect taxes and public service charges plus very large wage increases caused high inflation to become embedded in the economy, must be avoided on this occasion. The bank expects headline inflation to fall sharply in 2008, with the CPI rate forecast to fall to below 3%, assuming that the ECB does not continue to tighten monetary policy next year.

AIB says that Ireland’s fiscal position remains very sound as is evidenced by the fact that the General Government budget recorded a large surplus in 2006, while the government debt/GDP ratio fell to just 25%. The Exchequer returns for the first quarter of the year suggest that the Government is on course to meet its target of a budget surplus in 2007 of €2.3 billion or 1.2% of GDP.

The report says that it is the case, though, that the strong fiscal position is dependent on the continuation of relatively robust economic growth and that the tax base has been bloated by a large intake of property taxes from a buoyant housing market, which could well decline.

All of the major political parties have made generous commitments on either tax cuts or public spending increases, or on both, in the context of the upcoming general election. Delivery on expensive political commitments on taxation and public spending must be conditional on the economy’s ability to generate the wealth and activity to finance these electoral packages, without resulting in a serious deterioration in the overall public finances.