The "international crisis of confidence" in the Irish stock market is unlikely to abate in the foreseeable future unless the economy stages an unexpected recovery, Friends First chief economist Jim Power predicted yesterday.
And he said the next two years were likely to be the most economically challenging for the Government in a decade.
Speaking at the publication of Friends First's quarterly economic outlook, Mr Power said tax revenues will be affected by the sharp slowdown in housing activity, and the Government must therefore focus on controlling costs, particularly public sector pay.
The deterioration in the State's competitiveness must also be addressed to sustain prosperity, he said.
"The loss of competitiveness has started to impact on Ireland's export performance. This slowdown in export growth marks a major change from the conditions that characterised the Celtic Tiger period."
Mr Power sees GDP growth easing back from 5.7 per cent in 2006 to roughly 4.8 per cent this year, and possibly as low as 3.8 per cent in 2008. This would represent the lowest growth rate in 15 years.
The housing market has been characterised by stagnation so far this year, as buyers remain on the sidelines in anticipation of further price falls.
Mr Power anticipates that national average house prices will fall by 2 per cent in 2007. He described the recent stamp duty reform as "totally unsatisfactory" and said it would have no material impact on the market, which would continue to stagnate over the coming 18 months.
Meanwhile, house completions are expected to fall from 93,000 in 2006 to 70,000 in 2008, which will lead to up to 30,000 construction workers losing their job.
Other elements of the construction sector will undoubtedly take up some the slack, Mr Power said, such as infrastructural projects, while some construction workers will find employment in London where preparation for the 2012 Olympics is under way.
Inflation is likely to have peaked at 5.1 per cent earlier this year, he says, and it may slow to 2.8 per cent in 2008, as mortgage interest rate increases will no longer be a contributory factor.
Further increases to mortgage interest relief are expected in the December budget, and while the European Central Bank rate may hit 4.5 per cent later this year, this would represent the peak of the cycle, he said.
