The European Commission expects the Irish economy to grow by 3 per cent this year and to remain sluggish next year before bouncing back as the global economy recovers in 2004.
The Commission cut its 2002 GDP growth forecast for Ireland from 3.5 per cent to 3.3 per cent and predicted a budget deficit of minus one per cent this year and next.
In its economic forecast published today the EU Commission said that Ireland, as a small open economy, is expected to benefit significantly from the expected recovery which has been put back until 2004. But in the meantime continuing high inflation and poor confidence levels from job losses are depressing domestic demand.
"While activity will strengthen as the year progresses, 2003 will be another year of below potential growth," the Commission said.
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 expects wage pressures to prevail in the tight Irish labour market. "While the forecast assumes a gradual easing to 2004, growth in compensation per capita is expected to remain relatively high because of a continued tight labour market and sticky inflation expectations."
The Commission said forecasts that inflation should fall in 2003 and 2004, in response to lower earnings growth and easing excess demand pressures, leading to a narrowing differential with the euro area average.
The EU noted the deteriorating condition of Ireland's public finances.
From a surplus of 4.4 per cent of GDP in 2000, a surplus of "only"1.5 per cent of GDP was recorded in 2001, mainly as a resultof a significant undershooting of tax revenues.
"In 2002, a deficit will be recorded for the first time in Irelandsince 1996, of 1 per cent of GDP. This is due to both theeffect of the cycle, as GDP growth decelerates, but alsoto discretionary measures," the EU report says.
In 2003 and 2004, according to the forecasts, deficits of about the same size in terms of GDP as that of 2002 are expected.