Bank cuts growth forecast to 0.5%

Ulster Bank today became latest organisation to drastically revise down its growth forecasts for the Irish economy.

The deteriorating domestic and international economic outlook has prompted the bank to cut its growth forecast to 0.5 per cent in its latest Quarterly Economic Outlook, down from the 2 per cent growth forecast at the start of the year.

While the medium term for the Irish economy "remains favourable" and growth is expected to rebound to 2 per cent in 2009, the bank says growth has slowed "sharply" at the start of the year.

It said GNP growth in 2007 was 4.5 per cent but says this will slow to 0.5 per cent this year before rebounding to 2 per cent in 2009.

It notes that over the last quarter the dollar and sterling have each fallen by 5 per cent against the euro making it more difficult to export while oil prices have risen 20 per cent, adding significantly to costs.

Ulster Bank has also revised down its consumer spending growth forecast from 3 per cent to 2 per cent, saying that rising interest rates, reduced credit availability and deteriorating consumer confidence was making shoppers cautious.

Tax revenues are forecast to come in below Department of Finance expectations, the bank predicts noting that the Budget deficit may reach 2 per cent. The Government forecast is 0.9 per cent.

Inflation pressures should ease over the remainder of the year coming down to an average of 4.4 per cent based on an assumption that food prices will continue to rise and that oil prices remain near current levels. For 2009 the bank expects inflation to abate to under 3 per cent.

While the bank expects house prices to fall further this year, it anticipates that the rate of decline will ease in the second half of the year resulting in an annual average house price fall of 5 per cent.

Due to the fall in house sales, the rate of increase in mortgage credit dropped sharply and is now growing at 10 per cent.

While the bank has made a minor downward revision to its new house completions forecast down to 42,500, it notes that the outlook for commercial building has deteriorated and said the construction slowdown will extend into next year.

According to Ulster Bank affordability "is now back at 2004 levels [and] it is confidence, not affordability, which is now delaying the recovery".

It said since its last quarterly report, consensus growth forecasts have been lowered in the US from 2 per cent to 1.3 per cent and from 1.8 per cent to 1.6 per cent in the UK. In the euro zone growth rates have fallen from 1.8 per cent to 1.5 per cent.

The bank said there was "little the Government can or should do about the current economic situation other that let the deficit rise as tax receipts weaken, and not to exacerbate the situation by tightening fiscal policy as happened in 2001."

It also calls on the Government to ensure that the next pay deal reflects the lower inflation environment.