BANK OF Ireland has cut its economic growth forecast due to a more severe slowdown in the housing sector but still expects the economy to grow by 3 per cent this year, buoyed by strong exports. Simon Carswell, Finance Correspondent, reports

The bank said in its latest quarterly economic outlook that the economy would grow by 4 per cent next year. It had expected 4 per cent growth this year but has reduced this estimate as it now expects 8,000 fewer new houses to be completed this year.

Bank of Ireland chief economist Dan McLaughlin said the housing slowdown would knock 1.3 per cent off Gross Domestic Product (GDP) this year as he forecast 50,000 house completions this year, down from 78,000 last year.

He is expecting employment growth of 40,000 this year as construction job losses are offset by new jobs in the services sector. Dr McLaughlin's outlook is more upbeat than most other forecasts as he believes the economy will be bolstered by strong exports, particularly in services. He said the economy was experiencing "a cyclical slowdown" and that the outlook was "not great but not the end of the world either".

He added that the economy grew by 5.3 per cent last year, in line with growth between 2001 and 2006. "We will get 3 per cent growth this year. People say that's a bit optimistic but given that we have come from a period where growth has been around 5.5 per cent it will feel like a weaker economy."

Dr McLaughlin said State spending on infrastructure would only partially offset the housing slowdown, leading to total construction falling by 5.1 per cent this year. He said housebuilding would fall from 9.2 per cent of GDP in 2007 to 7.7 per cent this year, but that the sector would recover next year. The bank expects Irish exports to grow by 5 per cent, compared with a 8.2 per cent rise last year, and consumer spending to increase by 4 per cent this year from 5.4 per cent last year. Earnings would rise 4.7 per cent this year from 5.3 per cent last year. Dr McLaughlin said the ECB would cut rates by 0.5 percentage points to 3.5 per cent by the end of the year due to slower economic growth, despite inflation remaining high. He said the banking crisis added uncertainty to growth but that the US government's $150 billion (€95.48 billion) fiscal package would determine the severity of the downturn.

"The uncertainties lie around how prolonged the credit crunch is, how big an impact that has, and particularly, how the US economy responds to the fiscal and monetary stimulus." Tax receipts this year would be €1 billion short of the figure projected in the Budget, leaving a €2.8 billion deficit, which, at 1.4 per cent of GDP, was "in line with the EU average".

The bank's outlook for this year is considerably more optimistic than the recent 1.8 per cent GDP growth forecast from the ESRI.