The short to medium-term outlook for the Irish economy has weakened on the back of the slowdown in the housing sector, Minister for Finance Brian Cowen said today.
"While the economy has performed well in the year so far . . . the indications are that the short- to medium-term outlook has deteriorated somewhat," Mr Cowen said in a speech at a conference of Irish insurers in Dublin.
"This mainly reflects prospective developments in the new housing market, where available indicators provide clear evidence that output levels peaked last year," he said.
A moderation in new housing output would "exert a drag on overall growth rates" as completions fell to more sustainable levels of around 60,000-70,000 units per annum, he said.
Housing completions are expected to be around 80,000 this year, already down from more than 90,000 in 2006, as Ireland's construction sector - a key plank of a thriving economy in recent years - cools.
The Construction Industry Federation warned last month that output could drop as low as 50,000 units next year if the Government did not act to restore confidence.
The challenge, Mr Cowen said, would be to find alternative sources of growth to drive the economy. "For a small trading nation such as Ireland, a stronger export performance will be a key determinant of future improvements in living standards," he said.
"This highlights the importance of improving the economy's international cost competitiveness." In this regard, the associated rise in the cost of living from high domestic inflation - running at 5 per cent so far this year - was worry, the Minister said.
While most factors affecting inflation were "outside our reach" - such as interest rate increases by the European Central Bank - wage restraint could help keep a lid on domestically-driven service sector inflation, he said.
"We all have to be realistic in our expectations and acknowledge that wages should at most rise in line with productivity."
GDP growth is now expected to slow to 3.5 per cent in 2008 from 5.2 per cent this year, according to the latest Reuters poll of economists.