Up to one-third of Irish manufacturing is in decline, according to IBEC's latest quarterly report. The employers' body says this finding reinforces its insistence that a renegotiation of the pay agreement is not possible. IBEC found the rapid expansion of the economy was being led by high-technology manufacturing which expanded by 14 per cent last year. However, the rest of the manufacturing sector, which represented one-third of output and half of employment, averaged a marginal decline.

Total manufacturing employment is around 140,000 out of a total workforce of almost 1.4 million.

This is despite the rapid expansion of the economy this year which IBEC said would be the fastest growing for the economy as a whole, with gross domestic product expected to rise by 11 per cent. It expects inflation to peak at 6.7 per cent and to average 5.5 per cent this year before falling back to 3.9 per cent on average in 2001.

However, Mr Brian Geoghegan director of economic affairs, insisted it would be extremely unwise to award pay rises to compensate for rising inflation. "It has to be recognised that half of this inflation is externally induced, resulting from the weak euro, oil prices and the rise in interest rates. These factors represent a real hit on living standards but in no way can they be offset by income rises. To do so would be to delude ourselves.

"We did this in the oil crisis in the 1970s and 1980s which led to perpetually high inflation levels, erosion of living standards, economic stagnation and very high unemployment."

He added that the answer had to lie in the Budget which would broadly have to focus on lower- and middle-income groups and postpone cuts in high-rate tax. Recognition about the realities of the global marketplace at the corporate level was also important.

He admitted that the end of Programme for Prosperity and Fairness would not necessarily be a disaster for the economy.

According to IBEC, the indigenous non-food sector fell by 0.5 per cent while the food sector, excluding drinks concentrates, fell by 0.8 per cent. The only buoyant sectors of traditional manufacturing were tobacco, wood and wood products, metal fabrication and transport equipment. "These firms would not be able to sustain any departure from the terms of the PPF without risking serious job losses or their economic viability," the report warned.

Mr Geoghegan added that even the extremely productive multinationals were concerned about wage inflation. However, he also admitted that many firms were being "flexible" and the terms of the agreement were not being adhered to strictly in many instances.