THE ECONOMIC slowdown will be limited to 2008 as the economy rebounds between 2009 and 2011, and outperforms the euro-zone area with annual growth rates of 3½-4 per cent, according to a new forecast from Davy Research.

In an upbeat outlook on long-term growth, Davy economist Rossa White predicted that higher productivity due to a larger workforce would lead to the economy performing at almost double the growth levels in the euro area.

He said the population would grow by an average of 1.5 per cent a year with the labour force rising at a faster rate due to a higher number of women between the ages of 25 and 54 working. Mr White said productivity would grow by at least 2 per cent a year until 2011 due to higher investment in infrastructure.

Davy said the number of immigrants would fall with net immigration dropping to 45,000 this year, from 67,000 in 2007, and to 20,000 by 2010. The firm said the population would grow from its current level of 4.4 million to 4.6 million by 2010.

Mr White said the Government could afford to borrow to invest in infrastructure as the country had one of the lowest debt ratios in the euro area. "If we were a company, you could say that we don't have enough debt," he said.

Davy stuck with its 2 per cent GNP growth forecast for 2008, making it the most bearish commentator on predictions for the year. Mr White said the housing slump would "bottom out" by the end of this year and activity would start to increase as builders cut the price of new homes and reduced the number of unsold properties on their books.

This would lead to an increase in new houses being built, he said, adding that builders cut prices by up to 20 per cent "in some pockets of Dublin" and that "the next stage is to see this becoming more widespread". He said second-hand house prices had been reduced to sell before new house prices were cut by builders.

Davy predicted that the European Central Bank would cut rates by 0.25 percentage points twice in the second half of this year. Mr White said property prices fell by about 10 per cent in 2007 and would fall by another 10 per cent this year.

"If we did have a bubble, we have deflated it. We have largely corrected the excesses in housing."

Mr White said an area of concern was the potential impact of the international banking crisis on the commercial property sector where valuations were "somewhat stretched". However, he said new building activity should be "relatively healthy this year" given how consumer spending has held up.

Davy said the economy had lost competitiveness because the Republic now had the highest price levels in the eurozone, despite productivity levels being among the highest in that area.