ECONOMICS: First the bad news. The slowdown in the economy is going to be a good deal sharper than the latest forecasts indicate.

Following the 4.5-5 per cent growth rate estimated for 2007, Irish economic growth in 2008 is going to fall well short of the 2.5-3 per cent range around which forecasts for the year are increasingly clustered.

My reasons for believing this are threefold. First, the forecasters continue to lean on the side of optimism in relation to house-building activity.

Their average expectation that 55,000 units will be completed this year rests in large part on the assumption that there will be a pronounced recovery in housing starts in the next few months. This assumption is based on hope rather than evidence.

The most recently published data reinforces my opinion that house completions in 2008 will not beat the 45,000 mark. The 10,000 unit gap is equivalent to about 1 per cent off the overall economic growth rate.

Second, there seems to be a view that the housing sector and the rest of the economy operate as parallel universes, and that the sharp slowdown in the former will leave the latter untouched.

One manifestation of this thinking is the view that falling house prices will not adversely affect consumer spending. The recently published influential study by Vincent Hogan and Pat O'Sullivan*, which suggests that rising house prices did not independently boost consumer spending during the Celtic Tiger years, has been invoked in support of this view.

But, even if it is the case that the house price boom did not stimulate consumption, a proposition that jars with both theory and intuition, it does not follow that falling house prices won't have a dampening effect. There are good reasons to suppose that the relationship here is not symmetrical.

Third, as the forecasting community has become preoccupied with what has been happening in the housing sector and has adjusted its forecasts accordingly, other potent threats to economic activity have emerged that have yet to receive the attention they warrant. I'm thinking in particular of the severe dislocation of world financial markets over the past six months or so and the potential that this has to depress Irish economic activity through numerous channels, including adverse currency movements, a weakened international economy and restricted credit availability.

These developments dampen the prospects for exports and non-residential investment, yet, in general, forecasts of both these aggregates for 2008 are little changed now from what they were six to 12 months ago.

The good news is that, in the overall scheme of things, whether the economy expands by 2-3 per cent in 2008 or by rather less doesn't matter a great deal. Even in the worst case (but by no means implausible) scenario, where slowdown turns into fully-fledged recession, the resultant decline in output would entail giving up only a very small fraction of the gains in employment and living standards that have been chalked up in Ireland over the past 15 years.

What this sort of perspective suggests is that, what ultimately matters is not the economy's performance over the coming 12 months, or even two to three years, but its performance over the next decade and more.

That long-term performance will depend on four things:

(i) the growth of the labour force;

(ii) the rate of increase in the quality of human capital;

(iii) the growth of the State's stock of physical capital, infrastructure in particular;

(iv) the rate of increase in productivity.

It will not be greatly influenced by movements in exchange rates, stock market indices or house prices, or by fluctuations in house-building activity.

Over the coming year or so we would do well to constantly remind ourselves of these fundamental truths. Inevitably, the vicissitudes of economic slowdown or recession will compete strongly for our attention in the period ahead, and will, of course, be acutely felt by those individuals who lose their jobs and by those businesses forced to shut down. But our perspective must be chiefly informed by the longer term and the bigger picture.

This injunction applies particularly to policy-makers. At a time when crisis management may well threaten to inundate the agenda, it will be more than usually important that policy-making be firmly anchored to long-term objectives. In this connection, the National Development Plan provides an obvious focus. Its fulfilment must remain an overriding objective of economic policy.

It is imperative that the problem of deteriorating public finances is not addressed, as in the past, by deferring or postponing key infrastructure projects.

Equally compelling is the requirement that programmes needed to achieve important long-term objectives in the education area are not shrunk or sacrificed. The fact that the bulk of government spending on education is classified as current does not mean that it doesn't play a critical role in developing the productive potential of the economy.

* Consumption and House Prices in Ireland, ESRI Quarterly Economic Commentary, autumn 2007.

Jim O'Leary is a Senior Fellow of the Department of Economics at NUI Maynooth. He can be contacted at jim.oleary@nuim.ie