Bank of Ireland has cut its economic growth forecast for 2008 due to the weakening construction sector and slowing consumer spending. It has also predicted that unemployment will reach 6 per cent.
In its latest quarterly economic outlook the GDP growth forecast has been revised downwards to flat for the year, from 3 per cent previously.
Dan McLaughlin, the bank's chief economist said everything that could go wrong for the Irish economy has gone wrong; the credit crunch has lasted a year, oil rose from $100 to $145 in the three months to July, Irish equities have fallen 30 per cent this year, the ECB has raised rates despite slowing activity in Europe and sterling and the dollar have remained weak.
According to Mr McLaughlin, "business and consumer confidence has crumbled in the face of this barrage, resulting in a sharp fall in non-residential capital spending . . . and a marked slowdown in consumer spending".
He said the rapid slowing in GDP had come as a surprise and was due to the construction sector contraction and the "sudden slowing in services exports is the other unexpected development", adding that these exports dominate Irish GDP.
Mr McLaughlin predicts a marginal rise in incomes and marginal GNP growth of 0.6 per cent, although he added that this would reflect a fall in profitability for multinationals.
Against this backdrop, employment growth looks set to slow from 54,000 recorded in the first quarter to an average of 25,000 for the year as a whole, resulting in an average unemployment rate of 6 per cent.
He cautioned that these forecasts were clouded by uncertainty over oil prices, ECB policy and the duration of the credit crunch. The fall in house completions will not last forever, Mr McLaughlin added, saying that "at some stage they will cease to become a significant negative for growth".
Looking forward Mr McLaughlin expects GDP growth to ease forward by 1.5 per cent next year unless oil prices and interest rates fall sharply. "A fall in oil prices and lower interest rates would lead to stronger growth than forecast, but neither of these is guaranteed".
He said inflation should ease next year. The Central Statistics Office yesterday reported that inflation for June rose to 5 per cent.
One noteworthy development has been the slowing of consumer spending in the country against an acceleration of spending when Irish residents go on holiday.
Consumer spending growth has slowed to 3.5 per cent from 5.4 per cent, with Mr McLaughlin predicting real spending growth of 2.5 per cent for the year.
He said spending abroad by Irish residents had grown by 30 per cent in the first quarter compared with a 2 per cent rise in spending by tourists coming to Ireland.
