Economic growth will slow sharply to just 2 per cent gross national product (GNP) this year as the downturn in the housing market and slowing employment growth take their toll on the Irish economy, according to a new assessment by Ulster Bank.

In one of the gloomiest forecasts for the economy yet, Ulster Bank chief economist Pat McArdle said the Republic's high rate of inflation would also plunge in 2008, disappointing recent "over-optimistic" expectations on the part of social partnership wage negotiators.

Prices will rise by 3.1 per cent this year, compared to an average inflation rate of 4.9 per cent in 2007. This will bring the Republic's inflation rate closer to the euro zone average, but still above it. Economic activity will be heavily influenced by the number of new homes built, said Mr McArdle, who is predicting that 45,000 houses will be completed this year, down from 78,000 in 2007.

But he warned there was a "greater than usual" degree of uncertainty about forecasts for the housing market.

Despite the dramatic dip in the economy, which grew by an estimated rate of 5.1 per cent GNP last year, Mr McArdle said the Republic would perform better than its main trading partners and would enjoy a rebound in growth to 4 per cent in 2009.

Consumer spending will decelerate to 3 per cent, reflecting slower employment growth and more moderate wage increases in the order of 4 per cent, he said.

But this compares favourably to other western economies, where nervousness among consumers is adding to recession fears. "Unlike the US and the UK, there is no evidence here of home owners using mortgage equity withdrawal to boost consumer spending," Mr McArdle noted.

This means that the effect of the weak housing market on the economy will only have an indirect effect on consumption, through reduced employment in the construction sector and more subdued spending on items like furniture and hardware. A range of economists have recently cut their forecasts for the fortunes of the Irish economy this year, with the Central Bank saying last Friday that it expected GNP growth of 2.6 per cent.

However, Minister for Finance Brian Cowen last week stuck to his budget day economic forecasts of 2.8 per cent growth in real GNP and 3 per cent growth in GDP in 2008.