A "dramatic slowdown" in the number of new houses being built in the State has been blamed for the latest downward revision in economic growth forecasts for 2008.
The Economic and Social Research Institute (ESRI) said in its latest quarterly economic commentary, published yesterday, that the economy would grow by 4.4 per cent this year, compared to its forecast of 4.8 per cent three months ago.
It has revised its economic growth forecast for 2008 down to 2.9 per cent from the 3.7 per cent it predicted in June.
The ESRI said the number of new houses completed this year would fall to 76,000 and 65,000 in 2008, lower than it had previously thought.
The latest figures from the ESRI show the economy's reliance on the Irish building industry, which has been a key driver of economic growth in recent years. According to the ESRI, economic growth rates fall by 1.2 per cent for every 10,000 fewer houses built in the country.
As a result of the slowdown in house-building, employment in the construction sector could fall by 25,000 by December, according to the ESRI. It predicts an unemployment rate of 4.8 per cent this year, rising to 5.6 per cent next year. "It certainly appears gloomy because the housing figures are dragging down the whole growth figure," said Dr Alan Barrett, senior research officer at the ESRI.
"The housing sector is the real Achilles' heel of the economy at the moment. Because the economy has become so reliant on the housing sector, it was always going to be reflected in the headline growth rate. That is what we are absorbing at the moment."
The ESRI said house prices would fall by 3 per cent this year and would remain static in 2008, reflecting a recovery in prices early next year. It has revised downwards its forecast on the growth rate in taxes - it expects tax revenue to grow by 5.9 per cent this year and 4.2 per cent next year.
It said that the latest exchequer returns indicated a dramatic slowdown in growth rates, especially in capital taxes. An exchequer deficit of almost €1.4 billion is forecast for 2007, rising to €3.2 billion in 2008.
The ESRI said the Government needed to curtail the recent rapid growth in public spending next year to a rate of 8 per cent, but that it could still afford "a mildly stimulatory budget" in December. Dr Barrett described this as "a budget where there is spending on new government services".
The ESRI said it was basing its forecasts on the assumption that the European Central Bank would raise interest rates once more this year and that the turmoil in the financial markets would ease by the end of the year. The institute's forecasts were in sharp contrast to figures released by the Central Statistics Office (CSO) yesterday, showing that consumer spending, services and exports fuelled continued rapid growth in the economy during the first half of the year.
Gross domestic product (GDP), a measure of the wealth generated by the country, was €90.6 billion in the first six months of the year, 6.7 per cent more than the same period in 2006. GDP for the three months ended June 30th was €45 billion, a 5.4 per cent increase on the same period last year.
The figures show that during the first six months of 2007, consumers spent more than €44 billion on goods and services, 6 per cent more than for the same period last year.
The CSO also highlighted exports, which increased by €1.35 billion during the second three-month period, as another driver of strong growth. However, the numbers also show that there was a slowdown in industry and construction.