The European Commission has reduced its forecast for Irish economic growth this year and next, as part of a general downgrading of growth prospects for the EU.

Forecasts to be officially published today show the Commission has reduced its forecast for Irish gross domestic product (GDP) growth this year to 3.3 per cent, from 4.2 per cent previously. Meanwhile, it has reduced its 2004 forecast even more sharply to 3.2 per cent from 5.2 per cent.

The forecasts are part of a general downgrade by the Commission. It will nearly halve its euro-zone growth forecast for 2003 to 1 per cent, but the 12-nation area could fare even worse if the war in Iraq drags on, according to a draft report.

In its spring economic report, the EU's executive arm will slash the 2003 forecast from the previous figure of 1.8 per cent given in November, according to the draft obtained by AFX News, AFP's financial news subsidiary.

The downward revisions in the Irish growth forecasts bring the Commission's predictions more closely into line with those of domestic forecasters. The Central Bank recently predicted GDP growth of 3.25 per cent this year, while the Department of Finance expects GDP growth of 3.5 per cent this year, followed by 4.1 per cent in 2004.

While the Irish growth rate is well above the forecast euro-zone average, GDP growth here is inflated by the rapid increase in profits recorded by some multinational subsidiaries, particularly in the chemicals sector.

Gross national product (GNP), another measure of national output, excludes these repatriations. It is forecast by the Central Bank to grow by 1.75 per cent this year, while the Department of Finance has predicted a 2.2 per cent rise, still above the average for our euro-zone partners.

According to EU sources, the Commission sees growth in the euro zone falling to nearly nothing if oil prices soar and confidence plummets as a result of the Iraq war.

At a weekend meeting in Greece, EU finance ministers said the bloc was not immediately threatened by inflation, deflation or high oil prices but stressed that vigilance was required on all three fronts.

The spring report will underline the euro zone's faltering performance amid the global slowdown and, in particular, deficits facing its biggest economies - Germany, France and Italy.

All three, along with Portugal, are forecast to breach the euro-zone's limit (3 per cent of GDP) on budget deficits set out in the Stability and Growth Pact.

For the euro zone, the Commission will reduce its growth forecast for 2004 to 2.2 per cent from 2.6 per cent, according to the draft. But that depends on a limited fallout from the Iraq conflict.

In the worst-case scenario - oil prices of $35 a barrel and evaporating consumer confidence - GDP growth in the euro zone will crash to 0.2 per cent this year, the draft predicts.

Germany is expected to grow by just 0.4 per cent in 2003 compared with the Commission's autumn forecast of 1.4 per cent.