The Irish economy will be able to cope with the inevitable slowdown in housebuilding, which is running at an unsustainable pace, a report from a leading stockbroker said today.
An analysis by Davy Stockbrokers says a slowdown in housebuilding could knock as much as one percentage point off GNP in 2006 and 2007, still leaving a highly respectable growth rate of 4 per cent.
The construction boom has been the mainstay of Ireland's economic recovery since 2001. It has accounted for a quarter of the 400,000 increase in employment since early 1998 and accounted for over 40 per cent of all economic growth recorded last year, according to Davy economist Rossa White.
But there are increasing signs that the housebuilding boom has run its course. Over 40 per cent of houses built in the past two years are lying vacant as second homes, holiday homes or unlet investment properties, according to Davy's research.
This oversupply has also squeezed rental yields and raised concerns about a property crash if property investors head for the door at the same time.
The question is therefore not when but by how painful the slowdown will be, according to Mr White.
The extent of the slowdown on GNP will depend on the ability of the building industry to redeploy workers and the capacity of the rest of the economy to absorb the surplus.
On both counts, Mr White is confident that a knock-on effect of building slowdown on the rest of the economy can be avoided.
In a worst-case-scenario of a 7 per cent contraction in residential construction in 2006 and another 8.5 per cent reduction in 2007 such a downturn in the sector will knock one percentage point from GNP growth in each year.
Half of this is the real economic growth loss and the remainder is due to a methodological change in the national accounts, which has recently increased the weighting of construction in the overall economy.