The economy should experience a strong recovery in 2009 after the marked deceleration of this year, according to the latest economic commentary from AIB.
The bank - in its Irish Economic Update for February - says that the fundamentals of the Irish economy remain sound, so growth should pick up in 2009/2010 as the downturn in the housing market bottoms out and global growth improves.
AIB says that Ireland's economic performance remained 'impressive' in 2007, with real GDP estimated to have grown by 5.5% and employment up by 3.4%.
However, it predicts much slower rates of growth in output and employment for this year which it blames on a sharp contraction in housing activity and a weaker global economy. The bank forecasts GDP growth of 2.5% for this year and says this low growth figure is due to a slump in new housing output.
It says that housing completions will fall to around 50,000 this year from 78,000 last year. Such a decline will know almost 4% off GDP in 2008, it reckons.
'The external environment is also much more challenging, with a slowdown in key export markets and the currency appreciating strongly, so export growth will slow,' the report says.
AIB sees GDP returning to a growth rate of 3.7% in 2009 and 4.4% in 2010.
'Even if our forecasts prove overly optimistic, the downturn in activity is unlikely to derail the economy completely,' AIB says.
'The economy will still hold onto virtually all the substantial gains in output, employment and living standards achieved since 1993. Furthermore, the medium term growth prospects for the economy remain very favourable, judging by demographic trends,' it adds.
In a separate research note on the Irish housing market, AIB says that there is some anecdotal evidence that market sentiment is stablising with some renewal of buyer interest, although this has yet to translate into any strong upturn in sales.
The bank says it will wait for the results of the spring selling season to see whether there has been any significant improvement in market sentiment.
'We remain cautious of the Irish housing market, though believing that the next few months could well see selling prices close to their bottom,' it added.
The bank said that it is also not predicting any strong rebound. Instead it anticipates that prices will remain relatively static or at best rise modestly.
