THE MOST striking aspect of the current economic downturn has been the speed at which activity has decelerated. The economy was running relatively smoothly during 2007, with real Gross National Product (GNP) increasing by 4.1 per cent.
But in the space of a few short months, it has lurched to a halt. The continuing downward revisions to the country's growth prospects for this year and next by the leading institutional economic forecasters bear witness to the alarming speed at which the outlook for the economy has changed.
The Central Bank, in its quarterly bulletin published yesterday, has cut its forecast growth rate for the economy this year from 1.9 per cent in March to just 0.3 per cent. In so doing, it is following in the footsteps of both the Economic and Social Research Institute (ESRI) and the Department of Finance, both of which have recently revised downwards their expectations for economic performance in the current year.
All three of these leading forecasters share a broad view that the economy is now on the knife edge of recession. The Department of Finance and the Central Bank still foresee some small growth in the economy this year. For its part, the ESRI anticipates a small contraction in the economy's size during 2008. All hold the opinion that the risks are concentrated on the downside. In other words, there is a stronger probability that the out-turn for the year will be worse, rather than better, than their current forecasts.
Why has economic performance slipped so far so quickly? The answer lies in the construction sector. House building peaked in 2006, when 88,000 houses were completed. Less than half that number will be built this year. The Department of Finance has estimated that the fall in housing output during 2008 will subtract 4 percentage points from this year's growth rate.
But the downturn in housing output has not been contained within the perimeters of construction sites. It has led to substantial redundancies and layoffs among building workers. Reflecting this trend, the numbers on the Live Register climbed to 238,240 during July, the highest total since February 1998.
The slowdown in construction is now seeping through to consumer spending. Rising unemployment, virtually static employment, pay rises that are lagging inflation, higher interest rates, falling household wealth and the souring of consumer sentiment are together conspiring to weaken the pace of consumer spending growth.
In consequence, it is now inevitable that the volume of domestic spending - embracing consumer purchases, fixed investment and day-to-day Government spending - will fall this year. Moreover, any recovery during 2009 will be tepid.
In these circumstances, the only hope for an economic revival in the foreseeable future lies in foreign fields. The economy will remain in the doldrums until export growth on a substantial scale recommences. But an acceleration in the pace of export expansion must await the return of strong global growth.