Economic growth recovered in the second quarter of 2005, but remains below Government forecasts for the full year, according to the Central Statistics Office (CSO).

The figures show economic growth being driven increasingly by personal consumption and by investment in machinery and construction. There was a negative contribution to the economy from trade, as imports grew and exports fell year-on-year.

Reacting to the data, analysts praised the strength of the overall domestic growth, but expressed concern about declining productivity levels.

Annual growth in Gross Domestic Product (GDP), which measures the level of goods and services produced in the economy, was 4.1 per cent higher in the second quarter. Year-on-year GDP growth in the first quarter fell to 2.1 per cent due to strengthening car imports and declining exports.

According to the CSO, exports have stopped declining but remain weak, while import growth has eased due to a slowdown in car purchases.

The contribution from the external economy remained negative and growth continues to be driven by domestic demand.

Investment grew annually by more than 11 per cent in the first quarter, reflecting strong demand for machinery and equipment, as well as construction investment.

Personal consumption has grown by 4.7 per cent. Government spending remained subdued in the second quarter, rising by just 2.6 per cent.

The higher rate of growth in the second quarter remains short of the Government's forecast of 5.1 per cent growth for the full year. With GDP growth averaging 3.1 per cent in the first half of the year, the economy would have to grow by 7 per cent in the second half to reach the target.

Goodbody economist Dermot O'Leary emphasised the importance of domestic demand growth as an indicator of the economy's health. "On this measure, the Irish economy grew by a more impressive 5.5 per cent year-on-year in the [ second] quarter," he said.

However, he also drew attention to the difference between economic growth and employment growth. "A certain conundrum lies in the fact that output growth in the first half of the year [ 3.1 per cent] is less than employment growth [ 4.5 per cent]," he said. "The CSO suggested that the reason for this may be that employment is falling in the manufacturing sector, which consists of the higher-value added sectors of the economy."

Last week, the British government released data showing Britain's economy growing at its slowest rate for 12 years in the first half of this year.

In an interview with The Irish Times last month, Minister for Finance Brian Cowen said the Government would take account of the impact of oil price increases in its forthcoming budgetary forecasts. The Government's latest economic forecasts, produced over the summer, were unchanged from its previous budget-time forecasts, in spite of continued growth in oil prices.