Weakest economic growth since 1986 expected

ULSTER BANK has slashed its growth forecast for the economy, blaming the deterioration in domestic and international economic outlooks.

The bank lowered its forecast from 2 per cent to 0.5 per cent in its latest quarterly economic outlook. The forecast, the lowest so far among predictions for this year, would make it the weakest economic growth rate since 1986.

However, the bank is expecting the economy to recover in 2009, with a growth rate of 2 per cent, compared with 4.5 per cent in 2007.

The bank said house prices would fall further this year, having dropped 7.3 per cent in 2007, but it expected a levelling off in the second half of this year, leaving prices down 5 per cent by the end of 2008. Ulster Bank does not expect any change in euro-zone interest rates this year and is expecting the market turmoil, which has driven up bank funding costs, to continue into the second half of the year, if not into 2009.

The bank said "only part of the additional costs" had been passed on to mortgages and there was "a distinct possibility of further mortgage rate increases". It said that while the worst of the financial crisis appeared to be over, banks were still struggling with the consequences of higher rates and the reduced availability of loans.

Rising interest rates, lower lending, deteriorating consumer confidence and slower growth has led the bank to reduce its forecast for consumer spending from 3 per cent to 2 per cent. It expects 42,500 houses to be built this year and next - down from its earlier forecast of 45,000 for 2008.

The bank expects employment growth of 0.5 per cent this year and an inflation rate of 4.4 per cent if food prices continue to rise and energy prices remain high.

Ulster Bank chief economist Pat McArdle said: "Everything is adding up to conspire to give a bigger reduction."