Economic growth will slow significantly over the next 18 months primarily as a result of a correction in the housing market, the Bank of Ireland has forecast.
In its latest Quarterly Economic Outlook, the bank predicted GDP growth would fall to 4 per cent in 2008 from 5.3 per cent this year on the back of a "pronounced softening in the housing market".
But the bank did, however, forecast GDP growth would recover to 5 per cent in 2009.
The group's chief economist Dr Dan McLaughlin said: "The supply response to the softening in house prices has been pronounced, with completions set to decline to 72,000 this year from over 88,000 in 2006, and to 58,000 in 2008.
"This is ultimately supportive of house prices. House building will not fall forever, and our expectations of a growth rebound in 2009 is partly due to a forecast upturn in completions in that year," he said.
Bank of Ireland also said real incomes would be bolstered by a sharp fall in headline inflation, which will fall to an average of 2.7 per cent in 2008 from 4.8 per cent this year.
This would be further supported by European Central Bank rate cuts, the bank said, predicting two-quarter point reductions, starting in the second quarter of 2008.
Consumer spending which is set to grow by 4.5 per cent in 2008 following a 6 per cent expansion in 2007 is in line with the growth in real household income, and highlights the absence of any pronounced SSIA impact on spending, Dr McLaughlin said.
"The corollary is that consumer outlays are unlikely to fall away sharply, and the more modest projection for personal consumption in 2008 reflects a slowdown in household income growth, to around 7% from 9.5%.
This in turn largely reflects lower employment growth as net job creation may emerge at 43,000 against 72,000 in 2007," he added.
