Public finances will end the year in deficit as a result of a slowdown in the economy, while house prices will fall 3 per cent, according to a new forecast.
The Economic and Social Research Institute (ESRI) is predicting a swing in the Exchequer balance from a surplus of €2.2 billion in 2006 to a deficit of €622 million this year, deteriorating to €1 billion next year.
Economists at the ESRI say that as the housing boom ends, gross domestic product economic growth will slow to 4.9 per cent this year and fall to 3.7 per cent in 2008.
In its latest quarterly economic commentary, published today, the ESRI has sharply reduced its forecast for the property market and says that average house prices will drop by 3 per cent this year.
Investment in housing will fall 4.7 per cent this year and by more than 6 per cent next year, it is predicting.
ESRI economist Alan Barrett said more subdued rates of economic growth would not be catastrophic and should be seen as a return to a more sustainable economy.
But he warned that the economic slowdown could be more pronounced if high inflation rates result in pressure on wages.
At a time when growth in employment is slowing down, "excessive" wage increases would be "troubling", he said.
A less buoyant construction industry will mean employment growth will fall from 87,000 new jobs in 2006 to 58,000 this year and 25,000 in 2008.
The ESRI believes the number of workers coming to the Republic from overseas will also drop dramatically, with net immigration falling from 70,000 last year to 50,000 in 2007, before halving to 25,000 next year.
Unemployment, which ran at a rate of 4.4 per cent in 2006, will increase to 5 per cent next year.
Money from Special Savings Incentive Accounts is propping up consumer spending, it says, but once this money is spent, growth in consumer spending will tail off.
The ESRI has reduced its forecasts for economic growth and public finances since its spring economic commentary three months ago, when it said that GDP growth would be 5.4 per cent and the Exchequer balance would have a small surplus.
The deficit in public finances is driven by a fall in growth in capital tax revenues and the slower pace of economic growth, it said.
The Department of Finance is due to publish Exchequer figures for the month of June later today.
Mr Barrett said it was important that the economy shifted away from construction and focused more on the services sector and other industries.
But he said the Government had little scope to help the economy along its transitional path because its ability to ensure that wages remained flexible was limited.
"There's not a whole lot that the Government can do in the short term."
The main threat to the economy could come from the knock-on effect of rising interest rates in the euro zone.
If the European Central Bank continues to increase interest rates beyond the widely expected rate rise scheduled for September, it will push up consumer price inflation.
This in turn will lead to pressure from unions to renegotiate the Towards 2016 pay deal, according to the ESRI, which called for wage restraint.
A further loss of competitiveness would lead to a faster and deeper slowdown, it said.
Construction work being carried out under the National Development Plan would not be enough to compensate for the loss of construction jobs in a quieter housing market, Mr Barrett added.
A research paper by UCD professor Morgan Kelly, published by the ESRI yesterday, suggests that a correction in the property market could be more severe, with prices falling by 5 per cent each year for the next decade.
Property markets can move from booms to busts very suddenly, Mr Kelly warned.
