The Economic & Social Research Institute (ESRI) is still pessimistic about the economy, but not as downbeat as it was just more than a month ago.

According to its analysis, the economy may very well be in recession at the moment. The scale of the downturn may not constitute a technical recession, as defined by two consecutive quarters of growth, but what Mr Danny McCoy, the author of the ESRI's latest quarterly report, calls a "growth recession".

It is difficult to be precise given that Irish economic data are not as highly developed as the US equivalent and because there are no seasonally adjusted quarterly GDP figures.

As a result, it is impossible to say definitively whether or not the economy is in recession.

But, according to Mr McCoy's definition, growth which is substantially below what the economy is capable of, amounts to a form of recession.

His fellow researcher Mr David Duffy has pencilled in growth rates of just 0.5 per cent for the current quarter. Both analysts admit that the margin of error involved means that the real figure could well be negative.

But they are nevertheless quite insistent that they now foresee a pick-up in six months' time on the back of a rapid recovery in the US.

When the ESRI's Medium Term Review was published just over a month ago, research professor John Fitzgerald was assuming this pick-up would be postponed to 2003. So what has happened to changed the institute's mind?

Mr McCoy says the scenario in the Medium Term Review assumed that stock markets in the US would fall by 25 per cent and that the dollar would depreciate against the euro.

However, by last night the Dow Jones was only 1.5 per cent below its September 10th level. The dollar is also trading around similar levels to those which existed at the time of the attacks.

The ESRI is still assuming that the dollar will reach parity with the euro by the end of next year, a much slower and more leisurely depreciation than the original scenario. Hence, the effects on the competitiveness of the Irish economy will be equally muted.

Nevertheless, there is still a considerable degree of uncertainty around the new forecasts. It is simply impossible for anyone to know when the US economy will turn around. And the Irish economy is so small and open that its rate of growth simply cannot pick up again without the rest of the world.

Fed chairman Mr Alan Greenspan has admitted that he cannot know what will happen in the US next year.

The main plank of the ESRI's new optimism is that the recession or slowdown will be temporary. This would mean that firms may be likely to hoard labour rather than go to the effort and expense of laying off staff and subsequently rehiring next year. But so far it is not clear that this will be the response of many companies here.

High-tech US firm Celestica yesterday joined the growing ranks of foreign multinationals in either closing down, laying off staff or postponing investment. It is seeking 450 voluntary redundancies at its Swords facility.

Foreign direct investment has certainly slowed considerably, but as yet there have been no figures from the Industrial Development Board about the extent of this decline.

The agency is hopeful that the same numbers will be employed by foreign multinationals at the end of this year as last. Tax revenues are also down dramatically while Government spending remains high.

The ESRI is estimating that the Minister for Finance, Mr McCreevy, will have to borrow £500 million next year. But this assumes a prudent £500 million tax giveaway Budget and day-to- day spending increases of just more than 7 per cent. Whether either is possible in an election year remains to be seen.