Brussels predicts sharp slowdown here

The European Commission predicts Ireland's economy will slow down sharply next year, and that unemployment will rise. The Commission predicts the economy will recover in 2003, but not as dramatically as forecast on Tuesday by the OECD.

Introducing the Commission's autumn forecasts in Brussels, the Economic Affairs Commissioner, Mr Pedro Solbes, acknowledged that the economic prospects for the euro zone as a whole were gloomy.

"The prospects are a matter of concern, but there is light at the end of the tunnel. The slowdown is not expected to be as severe as in the United States and there will be no recession in the euro zone," he said.

Mr Solbes predicted that half a million people in the euro zone would lose their jobs next year, but expects unemployment to fall again in 2003. In the Republic, unemployment is expected to rise to 4.5 per cent next year and to stay at that level in 2003.

The Commission predicts that Irish GDP will fall from 6.5 per cent this year to 3.3 per cent next year, and will rise again to 5.5 per cent in 2003.

The OECD predicted a stronger recovery in 2003, with GDP rising to 6.4 per cent.

Earlier this year, the EU had forecast growth in Ireland of 7.5 per cent this year, falling to 7.1 next year and 5.5 in 2003.

Despite the revision, the Irish economy will grow faster than that of any other EU state in each of the three years - with the exception of Greece in 2002.

Mr Solbes said the slowdown in the world economy meant exports were unlikely to be a significant factor in the euro zone's recovery. "Historically, exports were an important trigger to recovery in Europe. This is unlikely to be the case this time. We think the recovery will be an internal one based on private consumption," he said.

The Commissioner did not rule out the possibility of negative growth in the euro zone during the next 12 months, but said there were unlikely to be two consecutive quarters of negative growth - the technical definition of a recession.

He declined to speculate on the potential impact on economic growth of lower interest rates.

But he predicted that euro-zone inflation would fall below the European Central Bank's target of 2 per cent during the first quarter of 2002.

Mr Solbes expressed particular concern about the German economy which is expected to grow by just 0.7 per cent this year and in 2002, before recovering to 2.8 per cent in 2003.

Rising unemployment is expected to depress consumer confidence in Germany next year, while an oversupply of private housing, especially in the east of the country, has caused a collapse in construction.

Mr Solbes drew back from criticising economic policies pursued by the member-states, but he warned that some countries, including Germany, risked creating current account deficits dangerously close to the 3 per cent limit imposed by the Stability and Growth Pact.