ULSTER BANK has forecast that Ireland will spend three years in recession with gross national product (GNP) set to fall by almost 14 per cent from 2008 to 2010.

In its quarterly economic outlook published yesterday, the bank forecasts that GNP will contract by 7.9 per cent this year, compared with its previous estimate of -4 per cent. Ulster Bank said the downward revision reflected a sharp contraction in consumer spending and investment.

It added that GNP will likely fall by a further 3.4 per cent next year as non-residential investment weakens further and ongoing job losses clip spending further.

According to the bank, unemployment is set to hit 14 per cent by the end of 2009, up from 7.7 per cent in 2008, and the highest rate since 1989. This forecast assumes 220,000 job losses this year, with more than half of them coming from the services sector and the remainder split between construction and manufacturing.

Ulster Bank expects a further 100,000 job losses next year, and an unemployment rate of 16 per cent by the end of 2010.

Housing remains the main drag on economic growth in 2009, according to the forecast. However, non-residential investment will eventually replace housing as the main negative for total investment activity, which is set to fall by 28 per cent this year and by a further 9 per cent in 2010.

It adds that continued weakness in the residential property market means that house prices will fall by an estimated 40 per cent from peak to trough.

As the numbers unemployed rise, it will further affect consumer spending which is forecast to fall by 6.5 per cent this year and by a further 5 per cent in 2010.

Next year the fall-off in consumer spending will subtract almost 3 percentage points from growth, with investment taking away less than 2 percentage points, a reversal of the pattern in the preceding two years.

The forecast suggests that the economy will experience deflation in 2009, for the first time since 1946. The extent of the decline in prices is even greater than previously expected, with the Consumer Price Index now set to fall by 4 per cent this year.

A recovery will likely be export led, and will follow recovery in our main trading partners, according to the outlook.