The Republic will be one of the more dynamic euro-zone countries this year, the latest European Economic Outlook from PricewaterhouseCoopers (PwC) states.
While economic growth will slow, it will be well ahead of the euro-zone average, according to PwC chief economist Ms Rosemary Radcliffe. But she warned
that policymakers needed to deal with inflationary issues including wage inflation.
Irish gross domestic product should increase by 8.5 per cent this year followed by 6 per cent in 2002, she forecast. This compares with average forecast GDP growth of 3 per cent for the euro zone in 2001, down from 3.3 per cent in 2000, and 2.75 per cent in 2002.
Within the euro-zone average, Spain and the Netherlands are expected to be among the stronger performers with growth of 3.75 per cent and 4 per cent respectively this year.
Germany and Italy are expected to be below average performers with growth of 2.5 per cent.
Domestic demand is expected to be the primary driver of eurozone growth, with a small positive contribution from net exports.
The assumptions underlying the forecasts include a soft landing for the US economy, a gradual improvement of the euro against the dollar, British growth of about 2.7 per cent in 2001 and stable oil prices - assuming a price of around $25 (€27) per barrel by the end of the year.
While Ms Radcliffe said these forecasts were the most likely scenario, she also set out a low-growth scenario with forecast GDP euro-zone growth of 2.25 per cent this year and 1.5 per cent in 2001 - a possibility if there is a sharp correction in the US equity market and the US suffers a hard landing.
The European Central Bank is expected to remain cautious on interest rates in an uncertain economic environment. She forecast no significant change in rates in the first half of the year and a slight fall in the second half.
The euro should gradually increase to around parity with the dollar at the end of 2001 and to $1.05 by the end of 2002, she forecast. But she warned of a wide margin of error in this forecast.
