In its summer bulletin, the Central Bank says that the balance of risk to overall growth this year and next is on the down side. It says that GDP growth of 0.6% is forecast for this year, though this should pick up to growth of 2% next year.
Rising energy costs will push inflation higher, while the recovery in the housing market may be delayed due to the tightening of lending criteria.
Earlier this month, the Central Bank cut its forecast for GDP and GNP growth for the third time this year and said it expected it to be 'significantly less than 1%' in 2008.
'A pick-up in output growth to about 2% is forecast for next year, on the basis of a gradual stabilisation in the domestic housing market during the course of the year and a modest recovery in exports,' the bank says in its quarterly report today.
'Although housing output is declining to a level which is somewhat below the sustainable level relative to underlying housing need, a major uncertainty is the extent of the overhang in supply,' it says.
The bank says there is a reduced level of demand due to weak confidence and uncertainty as the future path of the building industry. The tightening of lending standards in the mortgage market may also lead to a delay in the sector's recovery, especially in the first time buyers market.
Housing output is set to fall back dramatically this year, with completions falling by more than 42% to about 45,000 units, the bank said.
The weak outlook for domestic demand should help moderate inflationary pressures, but rising energy and commodity prices will exert upward pressure at the same time, it added.
'Disposable income growth has been eroded by high consumer price inflation and the emergence of weakness in the labour market, mainly emanating from declining construction employment, but also reflecting a more generalised weakness in labour demand,' the bank said.
The Central Bank also said that headline inflation in the euro zone is expected to remain elevated throughout this year and well into next year, due to the impact of food and energy prices.
Persistent strains in financial markets and high commodity prices continued to act headwinds to growth within the euro zone, it added.
'These negative factors have intensified and are likely to have a more significant impact on euro area activity as the year progresses," the bank said.
Even so, the bank said, demand from emerging market economies for euro zone goods and services remained strong.
