THE CENTRAL Bank yesterday cut its 2008 forecast for growth in real Gross National Product (GNP) to 1.9 per cent from 2.6 per cent just three months ago.

A halving of the anticipated pace of domestic demand growth this year is the proximate cause of the downward revision in the bank's economic forecasts for 2008.

Real domestic expenditure is now forecast to advance by just 0.7 per cent this year, according to the bank's latest Quarterly Bulletin, published yesterday. At the beginning of 2008, the bank was projecting a 1.5 per cent increase in domestic demand volumes this year.

The severe contraction in the construction sector is now subtracting from economic growth and stifling the expansion of domestic spending.

The bank is forecasting that the volume of construction spending will fall by 12.5 per cent this year, with the number of housing completions declining from 78,000 in 2007 to a projected 50,000 in 2008.

The bank is anticipating further slippage to 45,000 housing completions in 2009.

Last year, total construction spending accounted for 23 per cent of Gross National Product (GNP).

Thus, the 12.5 per cent fall in real construction expenditure forecast for this year is subtracting 2.9 percentage points from this year's real growth rate in GNP.

Moreover, the bank warns that the risks to its latest forecast are on the downside.

The fall in housing output may be greater than expected and the contractionary effects could spill over into commercial and retail investment.

Moreover, the global credit crunch is beginning to bite in the building sector.

"There is already some evidence that tighter current credit conditions associated with financial market turbulence are impacting on the roll-out of some residential and non-residential schemes", the bank's bulletin notes.

The growth in real consumer spending is expected to ease back to 3.4 per cent this year from 5.4 per cent in 2007, reflecting much weaker employment expansion and the absence of payouts from special saving incentive accounts (SSIAs).

Underlying consumer price inflation - excluding mortgage interest payments - is forecast by the bank to edge upwards from 2.8 per cent last year to 2.9 per cent in 2008, due to the steep upward movement in food and energy prices.

The headline rate of inflation, measured by the Consumer Price Index, is expected to decline steeply, from 4.9 per cent in 2007 to 3.2 per cent this year.

This deceleration is based on a technical assumption that financial markets are correct in their assessment that European interest rates will ease as the year progresses.

The slowing pace of economic growth will subdue the pace of employment expansion, while causing unemployment to rise this year.

The bank is now forecasting that 11,000 people will be added to the national workforce during 2008, representing a jobs gain of just 0.5 per cent.

The level of unemployment, using International Labour Office definitions, is expected by the bank to rise by 32,000 to 133,000 this year.

As a result, the unemployment rate - the numbers out of work as a percentage of the labour force - is forecast to rise from 4.5 per cent in 2007 to 5.9 per cent this year.

Figures published yesterday by the Central Statistics Office show that, already, the unemployment rate has risen to 5.5 per cent.

On a seasonally-adjusted basis, the numbers on the Live Register increased by 12,000 to 199,900 during March.

This represents the single biggest monthly increase since the seasonally-adjusted series commenced in 1967.

In the first quarter of this year, the numbers on the Live Register have risen by 28,000.

While the monthly Live Register measures benefit claimants rather than the numbers out of work, it is a useful proxy for short-run changes in unemployment.

However, with the housing correction largely completed during 2008, the bank foresees a brighter economic outlook for 2009.

Real GNP growth is forecast to rebound from 1.9 per cent this year to 3.2 per cent next year, while the pace of employment expansion is expected to pick up, with the numbers at work projected to increase by 33,000 in 2009.