Recession, Job Losses, Renewed Emigration

The Irish Times

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ESRI warns of recession, job losses and renewed emigration
PAUL TANSEY, Economics Editor

THE ECONOMY will experience a recession this year for the first time since 1983, and a return to net emigration next year, the Economic and Social Research Institute (ESRI) forecasts in its latest Quarterly Economic Commentary, published today.It anticipates that the economy will contract in size by 0.4 per cent this year after growing by 4.5 per cent in 2007.

This recession reflects a steep decline in domestic demand, according to the ESRI, which calculates that the volume of domestic spending this year will fall by 2.6 per cent. Investment spending is forecast to fall by 14.9 per cent while real consumer spending growth in 2008 has been revised downwards by the ESRI to just 1 per cent from 3 per cent just three months ago.

Shares in Irish companies fell heavily as news of the report leaked into the market. Bank shares were particularly badly hit, with Bank of Ireland down 5 per cent. The ESRI expects economic growth to resume next year, with a forecast expansion rate of 1.9 per cent.
However, this will be insufficient to stem a recurrence of net emigration in 2009. The ESRI projects that the outflow of people from the country will reach 20,000 next year, a level of net emigration not seen since 1990.

The reappearance of net emigration signals a steep deterioration in domestic labour market conditions. The ESRI projects that the level of unemployment will increase by 60,000 or 60 per cent between 2007 and 2009. The unemployment rate - the number out of work as a percentage of the labour force - is expected to climb from 4.5 per cent in 2007 to 6 per cent this year before increasing again to 7.1 per cent in 2009. The numbers at work in the economy next year are forecast to be smaller than in 2007.

Yesterday, the financial services group Hibernian announced plans to move more than 500 jobs to Bangalore in India in the next three years. The recession will also derail the public finances. From an overall budget surplus of €5.2 billion in 2006, the Government is expected to incur a deficit of €7.4 billion in 2009, a turnaround of more than €12.5 billion in the space of three years.

As a result, the Government's overall budget deficit is projected to reach 3.9 per cent of Gross Domestic Product (GDP) in 2009. At this level, it would breach the 3 per cent budget deficit limit imposed by the European Union's Stability and Growth Pact. The large budget deficits projected for this year and next would cause the burden of the national debt to increase by almost 10 percentage points. The ESRI reckons that government debt as a percentage of GDP would rise from 25.4 per cent in 2007 to 34.5 per cent in 2009.
Reflecting the recessionary environment, house prices are forecast to decline in both 2008 and 2009.

The ESRI estimates that house prices were overvalued by 12.5 per cent in 2007 and it projects a 6.3 per cent decline in house prices this year followed by a further 1.5 per cent fall in 2009. From the new house price peak in February 2007 to the expected trough early in 2009, the ESRI estimates that new house prices will fall by 17 per cent in money terms and 24 per cent when adjusted for inflation.

However, despite the economy receding into recession, upward pressure on consumer prices remains pronounced. The ESRI has revised its prediction for the rate of consumer price inflation this year to 4.5 per cent from 3.4 per cent three months ago. However, it anticipates that inflation will abate to 3 per cent during 2009.

The Irish Times

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