The bank’s Spring Bulletin is one of its gloomiest quarterly reports for years and its forecasts make grim reading.
It also delivered a warning on the prospects for property prices after the boom and expressed concern about the strain on lenders.
The worries about house prices will send a ripple of fear through the ranks of over-stretched workers who’ve recently bought homes and also ring alarm bells for investors who’ve piled into the property sector to take advantage of low interest rates and tax breaks.
Borrowing for mortgages is still increasing at 23 percent a year and it dominates private-sector credit growth.
In January alone, euro 476 million was lent to house-buyers.
As a result of its concerns, the bank’s governor, John Hurley, has written to all the mortgage lenders reminding them of the need to maintain “high standards” and double check if borrowers can afford the repayments.
“Followup on-site inspections of lending procedures have now commenced,” the bulletin says.
More house building, lower economic growth and weakening employment prospects would suggest, says the bank, “that the market may now be close to balance.”
While it doesn’t predict a house price collapse, it says “there could even be some easing in prices from the very high levels of recent years.
“In the commercial property sector, vacancy rates have risen and rents have fallen in some areas and with the rather modest growth in prospect, the picture is unlikely to improve in the immediate future.”
In Dublin, industry sources estimate that the office vacancy rate is running at 19 percent compared to 14 percent a year ago.
Overall, the bank revised its growth forecast for the economy downwards – predicting Gross Domestic Product (GDP) growth this year of 3.25 percent compared to the 3.5 percent it expected last December.
It expects Gross National Product (GNP) growth – regarded as a more accurate measure for Ireland as it strips out foreign investment profits – will be 1.75 percent this year compared to its forecast three months ago of just below 3 percent.
“Trend GNP growth for the Irish economy should be about 4.5 to 5 percent a year.
“In the medium term this now seems set to fall to about 3.5 percent a year as labor-force growth begins to weaken and as the boost to productivity growth from the large influx of high-tech firms in recent years begins to decline,” the bulletin says.
It adds that there is only limited evidence of a reduction in inflation, which has been running at twice the euro-zone average in the three years to 2002.
It expects inflation to fall back to about 3.5 percent by the end of the year compared with about 4.75 percent in the first quarter.
The recent appreciation of the euro should reduce imported inflation but the “main problem continues to be home-grown services inflation,” the bulletin says.
Job prospects for this year have also deteriorated and unemployment is likely to rise to an average of over 5.75 percent.
“In fact, overall employment levels in the economy may contract slightly for the first time in 12 years.”