A report from AIB this morning suggests that GDP growth will slow to 3.3% next year because of a further weakening in housing activity, slower growth in consumer spending and government spending on services.
But AIB economist John Beggs predicts that this will recover to 4% growth in 2009, as the downturn in housing activity slows, providing less drag on the economy.
AIB says that the Irish economy continued to perform exceptionally well in the first half of this year with GDP up 6.7% and GNP up 5.7%.
However, growth is expected to be much weaker over the second half of this year and into 2008. It said that housing activity has already started to turn down sharply.
AIB now expects house completions will fall by 35% between mid 2007 and 2008.
The bank said other sectors of the economy are set to slow next year with consumer spending to weaken due to a sluggish growth in employment, a waning s SSIA impact and higher interest rates.
AIB said the economy is facing considerable headwinds.
'Meanwhile, the export environment is turning less favourable, with growth in Europe set to slow and the euro appreciating rapidly in recent months'.
AIB said that inflation is expected to average 4.8% this year with much of the rise from 4% last year due to increased mortgage costs.
However, it said that with ECB policy seemingly on hold, headline inflation can be expected to fall sharply to around 2.5% by mid next year.
AIB says there is no need for a tough budget this year despite tax receipts possibly coming in around €1 billion below target.
This is because Ireland's position remains very sound with the budget set to record another significant surplus of close to 1% of GDP this year.
It said the pre-budget outlook points to a deficit of €770m and this should not be viewed as a cause for concern given the marked slowdown in the pace of economic activity, the sharp fall in property related tax and the very low level of national debt.
'Fiscal policy should be counter-cyclical and thus stimulatory, if at all possible, during an economic slowdown', it said.
Mr Beggs said overall Ireland's economic performance remains impressive and a slowdown, not a slump, is expected.
'Overall, then, what we are forecasting is a slowdown in economic growth from its robust pace in 2006 and HI 2007 and not a slump in activity. Thus, the downturn in housing activity is not expected to derail the economy'.
