IT IS now clear that the economy is heading for a hard landing after the years of boom and bloom. Statistics charting current economic performance all point to a slump in domestic activity that has materialised very swiftly.
A steep downturn in construction had been anticipated in 2008 following the unsustainable building boom of recent years. It had been hoped, however, that the decline in activity levels could be contained largely within the construction sector. This has not proved to be the case. For it is now clear that the impact of the steep fall in construction output and employment has spilled over into other areas of the economy and is dragging down domestic demand.
Unemployment has risen by over 35,000 or more than one-fifth in the first five months of this year. There is now no expectation of any overall growth in the numbers at work during 2008. At the same time, those in employment are finding it increasingly difficult to make ends meet. The annual rate of consumer price inflation averaged 4.6 per cent in the first five months of this year. As a result, increases in average wages and salaries are barely keeping pace with rising prices.
These three factors - rising unemployment, an employment standstill and minimal real wage growth - are exerting a depressing effect on consumer spending. Retail sales volumes - which make up almost half of consumer spending - fell for the third successive month in April. Consumer spending is crucially important to the health of the home economy because it accounts for more than one-half of all domestic expenditure.
With construction investment still falling and consumer spending weakening, the only big spender left on the domestic economic front is government. The Government outlined ambitious spending plans in its 2008 Budget. However, the weakness in private sector spending thus far in 2008 has caused tax receipts to fall far below official expectations. In the first five months of the year, tax receipts dipped €1.2 billion or 6.4 per cent below budgeted levels. In consequence, the Government is now being forced to increase its borrowings to finance existing spending plans. Even if it were advisable, the Government cannot now afford to add demand to the domestic economy.
In sum, the Government is in no position to become the spender of last resort in the Irish economy. As a result, the volume of total spending - by investors, consumers and government - in the domestic economy will decline in 2008 for the first time in many years. The hard landing is already here.