Republic's growth forecast drops to 3.3%

The European Commission has revised downwards its forecast for economic growth in the Republic, predicting that the economy will grow by just 3.3 per cent this year. The Commission's Autumn Economic Forecasts, which were published in Brussels yesterday, predict sluggish growth in Ireland next year before the economy bounces back in 2004.

"While activity will strengthen as the year progresses, 2003 will be another year of below potential growth. For 2004, however, the projections assume growth to rise towards that commonly thought to be sustainable in the medium term, of above 5 per cent," the Commission said.

Introducing the forecasts, the Economic Affairs Commissioner, Mr Pedro Solbes, announced the launch of disciplinary action against Germany for breaching the 3 per cent ceiling on budget deficits laid down in the Stability and Growth Pact.

Mr Solbes warned that France was likely to exceed the 3 per cent limit next year and he expressed concern at the state of Italy's public finances. EU finance ministers have already censured Portugal for running a budget deficit exceeding 4 per cent in 2001.

The Government is expected to run a budget deficit, the first since 1996, of 1 per cent of GDP in 2002 and of 1.2 per cent in 2003. The Commission also predicts that Ireland's general government debt will fall more slowly than previously expected, to 35 per cent of GDP in 2002.

The Commission expects Irish inflation to rise from 4 per cent last year to almost 5 per cent this year. Unemployment is expected to rise to almost 5 per cent in 2003 but to fall again the following year.

Mr Solbes said the recovery in the euro zone's economy would come a year later than the Commission had predicted six months ago.

"After the contraction of GDP in the last quarter of last year, economic activity in the euro area increased moderately in the first half of 2002, but growth failed to gain momentum since the summer. The euro area growth rate is therefore forecasted to reach only 0.8 per cent as an average this year," he said.

Mr Solbes said economic growth would pick up in the second half of next year and would average 1.8 per cent in 2003.

"Private consumption holds the key to recovery next year, supported by higher nominal wages, an increase in employment and the release of some pent-up demand following eight quarters of weak consumption in a row.

"Moreover, the savings rate of households increased significantly in 2002 to more than 15 per cent of disposable income. The larger part of household wealth is not held in shares but in real estate. Moreover, corporate balance sheets have been strengthened in the 1990s, and are fundamentally sound," he said.

Germany reacted calmly to its censure, which the Chancellor, Mr Gerhard Schröder, described as understandable. Earlier this year, Germany persuaded EU finance ministers to block an official warning to Berlin about its budget.

Under the Stability and Growth Pact's excessive deficit procedure, the Commission recommends action to EU finance ministers. The ministers can ultimately impose heavy fines - in Germany's case amounting to tens of billions of euros.

But there is little chance that such action will be taken.

Belgium's finance minister, Mr Didier Reynders, said it was important that all euro-zone governments abided by the rules, regardless of their size.

"Large and small states in the EU must be treated equally. There is no reason not to take these responsibilities seriously where France and Germany are concerned.

"These countries should return to a normal course," he said.