Warning on building slowdown

Spain and Ireland are set for a prolonged slowdown in economic growth, according to Standard & Poor’s, as a drop in construction activity and consumer sentiment hits labour markets and weakens public finances.In a report published on Monday, the credit rating agency says house prices in the two countries – and the UK – are about 20 per cent overvalued and on the verge of a “protracted correction”.The impact of this on the broader economy 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”, says Standard & Poor’s. Construction accounted for 12.6 per cent of the total employment in Spain in 2006, compared with a European Union average of 8.2 per cent, it says.In Spain, unemployment in the construction sector has surged 53 per cent in the past 12 months, helping to fuel a 22 per cent increase in the number of immigrants out of work. Scores of small builders and property agents in coastal areas have gone out of business, and there are concerns about rising bad loan rates at some regional savings banks. House sales in the second quarter this year were 11 per cent lower than in the first three months, according to government figures.While acknowledging the downturn, the Spanish government has consistently played down its implications for the wider economy. Officials say their main worry at the moment is the impact of a broad slowdown in Europe on the country’s export and tourism sectors.“The construction downturn is mainly in residential home-building, which accounts for about one quarter of the total sector,” a senior minister told the FT on Friday. “At the moment, the Spanish economy can absorb the consequences of that.“We are more concerned about demand for exports and tourism from countries such as France, Germany and the UK. If there are big changes here, then the Spanish economy will face some difficulties,” he said.In a best-case scenario, Standard & Poor’s sees gross domestic product growth in Spain slowing to 2.5 per cent in 2008, from 3.7 per cent this year. This compares with official estimates of more than 3 per cent.In Ireland, growth is expected to slow to below 4 per cent from just over 5 per cent this year. However, under its “stress scenario”, which assumes a sharper than expected construction downturn, the rating agency sees the Spanish economy stalling next year, while Irish growth would drop to 1 per cent. “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 Standard & Poor’s.Source- Financial Times