Economic growth will slow to just 2.1 per cent this year - the lowest rate of growth since 1991 - as the downturn in the housing market worsens, according to Davy Stockbrokers.
The GNP forecast includes a prediction that 45,000 houses will be built this year - a 40 per cent drop in output on last year - and is the most pessimistic outlook for the Irish economy yet.
But although the economy is slowing, it is not stopping, and Davy said that it expected other areas of the economy, including strong consumer spending, to compensate for the housing downturn.
The imminent "bloodbath" suggested by the low valuations of Irish equities is "highly improbable", according to Davy.
After a subdued 2008, the Irish economy will recover in 2009, with GNP growth of around 3.8 per cent, Davy said.
This year will be the "mirror image" of 2007, Davy predicts, with economic growth picking up in the second half of 2008 after a sluggish first half - the reverse of what happened last year.
The housing market will suffer again in 2008, with house prices likely to fall a further 6 per cent and the pace of decline in housing output accelerating, according to Davy economist Rossa White.
"Most of the housing impact has yet to come through, so we will feel the pinch in the first half of the year," he said. The market will be flat in 2009, with a further 45,000 houses built, he added.
But there is "still plenty of momentum" in the rest of the construction sector, with Government infrastructure on track under the National Development Plan (NDP) and the commercial sector holding up "reasonably well", despite tighter credit conditions.
After a "shocking" year in which Irish equities fell 26 per cent in value and dropped out of favour with international fund managers, Dublin-listed stocks could climb by around 20 per cent in 2008, according to Davy's head of research, Robbie Kelleher.
"We expect the economy to bounce back in 2009 and that prospect should begin to be reflected in the stock market this year," he said.
Mr Kelleher denied that Davy was being bearish about its economic forecast for this year.
"I think if you were to rewind back to 1993 and say there would be 15 years of 6-7 per cent growth followed by one year of 2 per cent growth . . . people would have bitten your hand off for that formula."
DAVY'S WINNERS/LOSERS IN 2008
Winners
CRH and Ryanair
These two stocks are singled out by Davy as likely outperformers this year, "given the overly pessimistic outlook implied in the current ratings" - in other words, they look cheap.
Mortgage holders
The European Central Bank (ECB) will keep interest rates on hold for most of 2008, and may make a cut before the year closes, according to Davy, which says the ECB won't act on its current "hawkish" talk about inflation risk by increasing rates.
Farmers
Better times for farmers, with their incomes rising thanks to the sharp increase in global food prices. Milk prices are up 30 per cent year-on-year, while cereal prices are up 15 per cent.
Losers
Exports
Exports made a recovery in 2007, with estimated 8 per cent growth in volumes, but growth in Ireland's three major trading blocs - the US, UK and mainland Europe - will be lower in 2008.
Housebuilders
Housing completions will drop from about 78,000 in 2007 to 45,000 this year, according to Davy's new forecast, which it has dropped by 10,000 units since its last prediction.
Workers
The numbers of people claiming unemployment benefit will continue to increase during the winter months. The unemployment rate will edge up from a year-end estimate of 4.6 per cent in 2007 to 5.5 per cent this year.
