Economic turbulence in the US and UK is likely to have a significant effect on the Irish economy, Central Bank Governor John Hurley said tonight.
He said growth was likely to slow to around 3 per cent this year but could rebound to around 4 per cent in 2009 provided there were no adverse external developments.
Ireland's strong ties to the US and British economies meant there would inevitably be a knock-on effect in Ireland but "the scale of the impact is difficult to assess," he told the Irish Association of Pension Funds.
"Although it is likely to be significant, it may not be perhaps quite as great as some commentators have recently suggested," Mr Hurley said. Although he warned that a return to higher growth rates would depend on maintaining competitiveness.
With talks on a new national wage deal due to begin in earnest next month, Mr Hurley said: "This will require a sensible approach to pay determination and continuous improvements in productivity in both the private and public sectors of the economy."
Recent big falls in the share prices of Irish banks, which have lost about half their value over the last 12 months, should be "placed in the context of previous substantial increases".
"The current situation and outlook for the stability of Irish banks, based on an assessment of developments so far, is positive," Mr Hurley said.
The full extent of the slowdown in the US is unclear but growth will slow "substantially" posing risks to the eurozone generally said Mr Hurley, who is a member of the European Central Bank's (ECB) governing council.
The ECB has been trying to dampen speculation that it will follow the Fed's lead in the US and cut interest rates to try to stimulate growth. And Mr Hurley stuck closely to the governing council's position of acknowledging downside risks for the eurozone while insisting the risk of higher inflation is "on the upside".
Expectation of a further rate cut in the US has driven the dollar to its lowest level against the euro making eurozone exports expensive relative to those from the US.
This particularly affects Ireland as the US is our largest export market for merchandise goods and has a significant influence on the tourism and financial services sector.
The Fed has cut short-term interest rates from 5.25 per cent since last September to the current level of 3 per cent. Its chairman Ben Bernanke has hinted a further rate may be in the offing if the credit crisis continues to drag the US economy down. Commentators have suggested 0.75 per cent could be cut.
"There has been a significant monetary and fiscal policy response, but it is still unclear how deep or how long the slowdown may be. It is apparent, however, that [US] growth will slow substantially," Mr Hurley said.