IMF predicts economy will slow down sharply next year

The Irish economy is set to slow sharply next year as housebuilding activity wanes and interest rates rise, according to a new assessment from the International Monetary Fund (IMF).

The Washington-based organisation predicts that economic growth will slow from 4.3 per cent this year to 3.2 per cent in 2008.

The most recent forecasts from the Central Bank pointed to growth of 5 per cent in 2007 and about 4 per cent next year.

The slowdown will come, according to the IMF's annual assessment, as the economic support of maturing Special Savings Incentive Accounts fades away and domestic demand declines.

The forecasts are contained within a broadly positive assessment of the economy, which the IMF describes as "impressive", despite an increasing reliance on housebuilding.

The organisation also notes, however, that the risks to its short-term outlook are "tilted to the downside", saying that the housing market could cool more sharply than expected, or the global economy could deteriorate unexpectedly.

"If realised, these risks would further dampen economic growth, reduce Government revenue and increase financial sector stress," the IMF says.

The organisation acknowledges that rising interest rates had prompted "a welcome cooling" of the housing market but says the risk of "a sharper slowdown" remains.

The research quotes a study showing that sharp increases in house prices such as those experienced by the Republic are followed by sharp declines in about 40 per cent of cases.

The IMF, which oversees the global financial system, advises the Government that it must implement policies to support an adjustment to sustainable growth levels.

"Ireland's economic fundamentals are strong and the Government's commitment to sound policies is firm, so we expect robust GNP growth over the medium- term," said the IMF's mission chief for the Republic, James Morsink yesterday.

Tánaiste and Minister for Finance Brian Cowen welcomed "the very positive assessment of the Irish economy".

Mr Morsink highlighted the importance of sound public finances and wage moderation, as well as flexibility in the jobs market. The IMF advises against tax cuts and overspending.

Mr Morsink said the most important issue facing the public finances was age-related Government spending.

The IMF says that, even with the Government's existing plan to set aside money for public sector pensions every year, the national debt could rise "substantially" by the middle of the century.

The IMF also urges the Government to prepare for the ripple effects of a slowdown in the US economy, warning that the international risks to the Irish economy are, in general, "skewed to the downside".