Growth in the Irish economy is finally beginning to flag. But the economy has every chance of achieving a soft landing, where the pace of growth gently slows but does not disappear. The Economic and Social Research Institute's (ESRI) quarterly economic commentary, published today, puts numbers on these trends. The growth rate, as measured by real gross domestic product (GDP), reached a cyclical peak at 6 per cent last year. Now, the forecast is that the pace of growth will decelerate to 4.9 per cent in 2007 and 3.7 per cent in 2008. Reflecting the slowing growth rate, the pace of employment expansion is also forecast to slacken. Where additions to the national workforce reached 87,000 in 2006, they are projected at a more modest 25,000 in 2008.
The decline in house building is the proximate cause of the deceleration in national economic growth. Truth to tell, it had to happen. In recent years, Ireland has been building half as many houses as Britain, a country with a population 15 times our size. Ireland simply could not continue to add to the national housing stock at the rate of the 93,000 units built last year. The ESRI points out that where house building accounted for 6.4 per cent of gross national product in 1996, its share had risen to 15.5 per cent of GNP a decade later. Growth on this scale was unbalancing the economy.
The task now is to rebalance the economy by switching resources away from domestic towards foreign demand and from housing construction to the production of internationally-traded goods and services. This transition is necessary because a country of Ireland's small size cannot look indefinitely to its domestic market of just 4 million people to provide sustained economic progress for a growing population.
This is a task that will take time. The necessary transition requires structural changes in the way the economy operates rather than quick tax and subsidy fixes. Raising the education and skills of the workforce, modernising an inadequate physical infrastructure and stimulating innovation are requirements that are neither easily nor quickly realised. Yet such structural changes are imperative.
A first and useful step in the direction of structural change has been taken with the launching of the National Development Plan 2007-2013 earlier this year. However, it may now be timely for the new Government to review the plan. Such a review could audit the effectiveness of each of the plan's spending programmes in contributing to the twin objectives of enhancing competitiveness and raising productivity growth.
The economy is now at a crossroads. The Celtic Tiger phase of the 1990s, where the economy was exceptionally competitive and where growth was export-led, was followed by the current boom in domestic demand. This is now showing the first signs of subsiding. The turn we take next will define the prospects for economic and social progress for the decade ahead.