Goodbody Stockbrokers has issued the most pessimistic forecast yet for the Irish economy this year, blaming sharply declining activity in the building sector and weakening consumer spending.

The stockbroker, which had previously forecast gross domestic product (GDP) to grow by 1.1%, now expects it to fall by 2.2%. It also said house prices could have fallen by 30% from their peak by the end of next year.

Goodbody also said a recovery was not likely until 2010 because of falling employment and a further decline in construction.

Its report said higher interest rates and banks' tighter lending standards were prolonging the downturn in the housing market, hitting first-time buyers in particular. Goodbody said there was now a risk that house prices could continue to fall into 2010.

Economists Dermot O'Leary and Deirdre Ryan do not expect any growth in consumer spending this year, with only 0.5% growth next year, mainly because of rising unemployment. But they say inflation should ease next year from this year's 4.5% average.

Goodbody expects the Government to breach the EU's 3% of GDP limit for borrowing this year, due to a near-€4 billion shortfall in tax receipts, but adds that this is not a reason to panic.