There is now an "acute danger" that wage increases could undermine Ireland's competitiveness, the Economic and Social Research Institute has warned.

Growth in the economy will slow to 5.75 per cent this year, according to new predictions from the ESRI in its latest quarterly commentary. With companies trying to attract employees some increase in wage rates is inevitable, the commentary says, but there is a serious risk that unduly large increases could lead to a serious loss of competitiveness and undermine growth prospects.

The ESRI report issues a strong warning to employers about the wage increases they offer. Increases offered to attract employees must be based "on a sober assessment of trends in market demand and prices". Given that pay increases cannot easily be reversed " there are clearly some expansions which should not take place at the current time and some contracts which should not be sought if they could be fulfilled only through a permanent substantial raising of the cost base."

In a special section of the commentary, the ESRI argues that Ireland can learn important lessons form the collapse of the Asian Tiger economies. Referring to the financial failures in the Asian economies, it warns that there is also a danger, that the decision to establish a new financial services regulator may be made too abruptly in response to recent financial scandals.

It states that the Central Bank has done an excellent job overseeing the Irish financial system and it would "very risky" to change this without cause. "It is crucially important that they do not take hasty ill-thought through decisions," it states.

Looking at the overall economy, the ESRI is scaling back its predictions for the rate of growth in the economy in 1998. It states that some of the ["]more extreme["] estimates will prove false and it has revised down its own estimate to 8.5 per cent from 9.25 per cent for Gross Domestic Product growth in 1998. It has also revised down its estimates for GNP growth to 7.25 per cent from 8.25 per cent in 1998.

And the rate of growth will slow this year, with the ESRI predicting growth of 5.75 per cent in GNP, very close to what it considers to be the long run sustainable level of 5 per cent.

Separately, exchequer figures for the first two months of the year show the Government finances in a healthy state and confirm that the Irish economy continues to grow strongly.

Receipts and expenditure figures released by the Department of Finance yesterday show a Government surplus of £120 million (€153 million) at the end of February compared to a deficit of £11 million at the same time last year.

Tax revenue remained buoyant, increasing by 15 per cent to £2.48 billion from £2.15 billion.

The ESRI believes that the economy will continue to outperform the rest of the EU, but points to some dangers. One is the threat of an international - or European - slowdown or recession. But even if this were to happen the ESRI is relatively sanguine, pointing out that the structure of the Irish economy means that we are relatively protected form some of the worst effects.

The other main external danger according to the ESRI is the changing attitudes of many Europeans to the Irish. It argues that we should spend more time pointing out the continuing costs of our peripheral location, the relative deficit in infrastructure and the high proportion of employment based on agriculture.

At the same time we should not be stimulating antipathy by being seen to seek too much in terms of direct transfers, policy derogation or other special arrangements.