Confidence in the economy has fallen dramatically, with many people now worrying about job losses and house prices falling or even collapsing. But are these fears realistic?
There is, as yet, no conclusive evidence and opinion is still divided on the economy's future. However, all economists agree that confidence has taken a hit. According to Dr Dan McLaughlin, chief economist of Bank of Ireland and consistently one of the most bullish forecasters and to now one of the most accurate, there are two distinct forces at play.
According to data released earlier this week we know that the year began with a growth rate of some 12.5 per cent in Gross Domestic Product (GDP) - a huge head of steam. But it is also almost inevitable that the economy would have to slow down from such records.
With employment growth slowing from 5.5 per cent to 3.5 per cent as labour force growth slows, a downturn in GDP was inevitable.
In addition, confidence has been hit by both the downturn in the US and the fall-off in spending as a result of the foot-and-mouth crisis. The foot-and-mouth factor has now virtually disappeared and excise duties have recovered, along with internal tourism, which is picking up. Anecdotally, there is plenty of evidence of the slowdown. It is now possible to book many restaurants on the day you wish to eat, some carpenters and plumbers are calling builders to find work and houses are taking far longer to sell.
But is all this just the natural effect of slowing down rapidly? After all, if the economy was travelling at 70 m.p.h. last year it is now only travelling at 40 m.p.h. Things seem very different, but it is still an enviable position to be in when most European economies are permanently stalled in a traffic jam.
According to Dr McLaughlin the worst scenario for the Irish economy would be that falling confidence becomes self-fulfilling and the US falls into recession with a longer period of corporate retrenchment and resultant job losses in Ireland.
Prof John FitzGerald of the ESRI agrees. He points out that the US balance of payments deficit is simply not sustainable and at some point will be reversed with a sharply weaker dollar. This would hit the competitiveness of Irish firms, which have been getting a very easy ride since entering the euro zone.
He argues that we cannot collapse the economy ourselves - that outside factors would have to contribute - but further difficulties in the US combined with declining confidence would be the worst possible combination. It could even mean that growth would fall to as low as 2 per cent in future years - compared to Prof FitzGerald's current 6 per cent forecast.
The good news is that no matter how bad things get we are probably better off than Singapore. It too is very exposed to the high-tech sector and its growth has fallen from 10 per cent last year to around minus 9 per cent now. All commentators agree Ireland has a more developed services sector and a fall of this size is almost impossible. Dr McLaughlin points to the more optimistic scenario that the US has bottomed out and that Irish consumer spending will strengthen, now that the foot-and-mouth issue has been eradicated. This in turn will lead to growth.
The most likely outcome probably lies somewhere between these forecasts. One sector that could pose problems in the short term is the housing market. According to the normally optimistic Ms Marion Finnegan of estate agents Sherry FitzGerald it is quite possible that property prices may have stopped rising.
There is anecdotal evidence that prices at the top end of the property market have fallen already and there are fears that it could decline even more. The more expensive homes have been driven by equity market returns as well as the decline in the Irish tech boom. This wealth effect has almost dried up and house prices have fallen back.
The commercial property sector is also under serious pressure, with pension funds being inundated with offers of investment opportunities.
But the more average home may be less exposed. The demographics are still there to support the price and modest gains can be expected, according to Mr Jim Power, head of investment at Friends First. However, the danger is that declining confidence in the property market could become self-fulfilling. If sufficient people defer buying homes believing prices will be lower next year, then the price will be lower next year. However, this should right itself over the medium term.
Ms Finnegan argues that houses are still being sold at the lower end of the market. It is the middle price range of the market that has been affected by the difficulty many encounter in persuading banks to fund bridging loans. The result is it is taking far longer to sell homes and sellers have to have more realistic price expectations. Overall she says prices will be flat with no large appreciation or depreciation.
But interestingly mortgage lending was up 21.5 per cent in May - a very high increase by European standards and not far off the 24.5 per cent average of 2000. So perhaps the doomsayers are being hasty.
