A sharp downturn in the housing market will lead to economic growth of only 3.3 per cent next year, according to a report released by AIB this morning.
The latest economic outlook by AIB Global Treasury forecasts growth of 4.8 per cent in the second half of this year, down from 5.7 per cent in the same period last year.
Apart from housing, however, most sectors of the economy will register stronger growth this year, with net exports contributing some 2 per cent to GDP growth, according to the report.
The economy continued to perform exceptionally well in the first half of 2007 with a rise in GDP of 6.7 per cent. GNP growth of 5.7 per cent reflects strong growth in both domestic spending and exports, the report adds. Employment increased by some 4 per cent.
"However, growth is expected to be much weaker over the second half of this year and in 2008. Many of the factors which have been boosting activity are now waning. In particular, housing activity has started to turn down sharply," the report says.
"The scale of the decline in housing activity and the fact that it accounts for a relatively large part of the economy implies that the downturn in the sector will have major consequences."
The bank expects house completions to fall by 35 per cent between mid 2007 and end 2008, given the marked decline in housing registrations over the past year. In total, a 35 per cent fall in new housing output could take as much as 4.5 percentage points directly off real GDP in 2007/2008.
Consumer spending growth is also expected to weaken next year due to sluggish growth in employment, a waning SSIA impact and higher interest rates. A much less expansionary fiscal policy is also on the cards for 2008.
The export environment is turning less favourable, with growth in Europe set to slow and the euro appreciating rapidly in recent months.
"The economy is facing considerable headwinds," the report states.
Despite the gloom outlook, however, and despite the fact that tax receipts could fall short of targets by around €1 billion this year, there is no need for a tough budget from Minister for Finance Brian Cowen in December, according to AIB.
"Fiscal policy should be counter-cyclical and thus stimulatory, if at all possible, during an economic slowdown. Thus, we would not favour an overly restrictive budget and are not bothered by a small deficit in 2008 or, indeed, in 2009."
