Economic growth next year will fall to its lowest rate since 1993, according to two forecasts published yesterday.
The Economic and Social Research Institute (ESRI) said growth would remain above 5 per cent this year before falling below 4 per cent in 2008 as housing investment levels off.
In 1993, the year that the Celtic Tiger emerged, growth was 2.3 per cent.
In its Spring Quarterly Economic Commentary, the ESRI also warns the Government to tackle the economy's falling competitiveness by taking action to cool rising inflation and borrowing.
In a separate forecast, Davy Stockbrokers cut forecasts for growth this year from 5 per cent to 4.5 per cent. This follows Wednesday's release of data showing that house building fell in the last quarter of 2006 for the first time since 1997.
Davy forecasts that new house building will fall by a further 5,000 units in 2008, and says this will hit growth next year.
"We expect a further deceleration in the rate of growth of the economy in 2008. Housing output is forecast to drop to 75,000 new units and the pace of growth in consumer spending should slow to 2.5 per cent as the SSIA impact is reversed," says Davy economist Rossa White.
Wednesday's data, which was published by the Central Statistics Office (CSO), also showed a sharp annual decline in exports during the final quarter of 2006. Davy forecasts growth will slow to 3 per cent in 2008.
A study by Euroframe, a network of 10 forecasting and research institutes across Europe, including the ESRI, says the dollar is likely to weaken further this year and next, placing more pressure on exports.
The study, included in the commentary, says the dollar will fall to $1.35 against the euro this year and $1.40 in 2008. Currently, the euro trades around $1.32.
Gross Domestic Product (GDP), the level of annual output of goods and services in the economy, will grow by 5.4 per cent this year but by 3.9 per cent in 2008, the Quarterly Economic Commentary predicts.
"This slowdown in growth is driven by a slowdown in housing investment, while investment in other building and construction should continue to grow strongly, driven in part by investment under the latest National Development Plan," ESRI economist Dr Ide Kearney said yesterday.
The commentary contains an assessment of the sustainability of recent economic trends, in which the ESRI warns that the economy is increasingly vulnerable to housing market changes and high inflation.
"A decline in real house prices could lead to a much larger reduction in the scale of house building. The economy has been losing competitivenesss since 2002. We argue that it is now imperative to halt this trend."
The ESRI expects falling competitiveness will cause export growth to slow from 5.6 per cent in 2007 to 5.2 per cent in 2008, lower than the respective rates of import growth of 7.0 and 5.7 per cent. "As a result, Ireland will lose market share."
However, it also forecasts inflation will slow significantly from a predicted rate of 4.6 per cent this year, to 2.6 per cent in 2008.
A study of Ireland's adjustment to EMU, contained in the ESRI commentary, says the performance of Ireland's economy has been successful "up to now", but warns that its resilience will be "fully tested" should a downturn occur.
According to the study, Macroeconomic Adjustment in Ireland under EMU, public sector wage restraint is needed to lower spending growth and inflation.
It warns that Ireland has the largest share of exports outside the euro zone of any other euro zone economy, making it exceptionally vulnerable to both a downturn in the US economy and a depreciation in the US dollar. It also recommends reducing the economy's dependence on the property market, and calls for the introduction of a tax on second dwellings and the abolition of mortgage interest relief.