Ireland and Spain face a prolonged slowdown in economic growth because of a drop in construction activity and consumer sentiment which have begun to have an impact on labor markets and weakens public finances according to the US risk ratings agency Standard & Poor's.
In a report released Monday S&P says that house prices in Ireland, Spain and the UK have been among the fastest-growing in Europe over the past decade, and "these countries are now leading the subsequent downturn". S&P says house prices in the three countries are about 20% overvalued and on the verge of a "protracted correction". The impact of the expected correction in the housing market, would be more pronounced in Ireland and Spain, whose "economies are heavily exposed to the direct effects of the housing market slowdown on the construction sector", since construction accounted for 12.6% of the total employment in Spain in 2006 and 13% in Ireland, compared with a European Union average of 8.2%. In a situation where activity eases gradually, the Irish economy will grow by 3.8% next year, following growth of 5% in 2007, predicts S&P. However if the construction sector output slows very sharply, this growth could fall to 1% in 2008 from 4.8% this year. S&P anticipates a sharp contraction as similar to what the UK experienced in the late 1980s after the housing market boom in that country, or the slowdown seen in Germany after reunification. However UK's more diversified economy is less vulnerable to the construction downturn. Unemployment in the Spanish construction sector has risen 53% in the past 12 months, and the number of immigrants out of work has risen by 22%. In a best-case scenario, S&P sees GDP expansion in Spain slowing to 2.5% in 2008, from 3.7% this year. This compares with official estimates of more than 3%. "Under the benign assumption the construction sector as a share of GDP will moderate gradually back towards its 10-year average ... both Ireland and Spain are likely to experience a significant slowdown in GDP growth, beginning in 2008" says S&P. The agency says that it would take until 2015 to regain the growth rate that both countries could be expected to achieve in 2008, in a more orderly construction slowdown. This suggests that Irish GDP growth would remain below 4% for seven years after a severe slowing in construction. "A sharp downturn would have a much more debilitating effect for medium-term growth in Ireland and Spain," the report says. S&P also says that the heavily-indebted nature of the Ireland's private sector poses "significant risks over and above that of a construction sector slowdown.