Economic growth in Ireland is set to halve in 2002, but next year should see an upturn, according to the country's central bank.

Growth is likely to fall from 5.9% last year to just 3% in 2002, but should rebound to 6.75% in 2003, the Central Bank of Ireland said in its annual report.

But the growth forecast depends on a recovery in the global economy and on Ireland's ability to control inflationary pressures.

If inflation were to raise its head, it would have the "potential to seriously impact on the country's competitiveness", Bank governor John Hurley said.

Prices and wages

Ireland's consumer price inflation has been running ahead of the European average to the tune of 2.5% for two-and-a-half years, while wages rose 9% both last year and during 2000.

If price and wage increases do not moderate, they could "seriously undermine competitiveness and employment prospects," Mr Hurley observed.

He also warned against allowing inflation to rise, as proposed by economists who see it as a natural mechanism for slowing down an economy in danger of overheating.

"This would be a high risk remedy for overheating," he said.

"Inflation has a momentum of its own -- driven by expectations -- which could give rise to significant overshooting."

A sharp rise in government spending was blamed for some of the inflationary pressure.

Government spending, which grew by 17.5% last year, accounted for between 2.5% and 3% of the country's overall 5.9% growth rate.

The spending rise was far in excess of a 7.75% growth in revenues.