AIB has become the latest institution to predict that economic growth will not meet Government forecasts next year.

The bank also says the next government should respond to any slowdown in the economy by trimming growth in current public spending and not by raising taxes.

According to AIB's latest economic outlook, gross domestic product (GDP) - the output of goods and services produced in the economy each year - will grow by 3.7 per cent next year, down from this year's rate of 5 per cent. The Government forecast last December was for GDP to grow by 4.6 per cent in 2008.

Slower growth will mean that job creation will expand by only 2 per cent in 2008, compared to the 3.6 per cent growth expected this year. This will still see an extra 42,000 jobs created next year.

The unemployment rate is expected to remain stable at 4.4 per cent this year, but rise modestly in 2008 to 5.0 per cent.

Inflation will slow sharply from an expected 4.7 per cent this year to 2.6 per cent in 2008 as the impact of interest rate rises pass through the economy, according to AIB.

"Housing output is set to decline, while the effects of maturing SSIAs and an expansionary fiscal policy are likely to be less pronounced in 2008. Interest rates have also moved higher," the outlook continues.

However AIB chief economist John Beggs said the forecast did not represent a slump. "We are looking for a slowdown in the pace of economic growth from its very robust pace in 2006 and not a slump in activity," Mr Beggs said yesterday.

The report assumes that the European Central Bank will raise rates by a further half a per cent by the end of the year, implying that interest rates will peak at 4.25 per cent by December.

In the event of an economic slowdown, Mr Begg said the next government should respond by slowing the rate of growth in current spending growth and not by cutting capital spending or raising taxes.

Fianna Fáil, Fine Gael and Labour have assumed that the economy will grow on average by 4.5 per cent between 2008 and 2012 in economic policy documents produced in the run up to the general election. The Progressive Democrats have assumed average growth of 5 per cent.

AIB warns that delivering expensive commitments must be conditional on the economy's ability to generate wealth and activity.

Mr Beggs added that all the major political parties were running the risk of assuming too much growth from the economy in the future.