The economy exhibited modest growth in the second quarter of the year, according to data released yesterday.

The quarterly national accounts showed a 6.5 per cent rise in gross domestic product (GDP) and a 4 per cent increase in gross national product (GNP) over the same period in 2001. The results compare favourably with the first quarter of this year, when GDP increased by 4.1 per cent and GNP growth actually halted.

Cautioning that minor variations in income flow can distort quarterly results, the Central Statistics Office (CSO) said growth figures for the first six months of the year, which indicate a 4 per cent rise in GDP and a 2 per cent increase in GNP, offered a more accurate assessment of the health of the economy.

GDP is the value in monetary terms of the goods and services produced in the State. It is considered a more accurate indicator of quarterly growth than GNP, which is GDP less outflows from the economy such as profits repatriated by foreign-owned multinationals. GNP is a more-reliable indicator of long-term growth but can sometimes give a confusing picture on a quarterly basis.

Uncertainty about the world economy in the medium term continued to undermine investment, which declined by 1.1 per cent in the second quarter, according to the data. Ominously, Government expenditure climbed by 9 per cent since last year - a level of outlay that is likely to be unsustainable over coming months.

Industrial output rose by 11.6 per cent in the quarter. Exports and imports climbed by 4.8 per cent and 2 per cent respectively. Consumer spending remained robust, increasing by 2.3 per cent on second-quarter figures for 2001.

Commentators cautiously welcomed the results, saying they suggested the economy was better placed to withstand further global instability than previously thought.

The figures indicated a high level of stock-building in the second quarter, said Mr Dermot O'Brien, economist with NCB stockbrokers. Stock-building may have contributed as much as 2.75 per cent to GDP growth. Consumer spending moderated during the quarter but did not actually go into decline, Mr O'Brien noted. "The economy has displayed substantial resilience," he said.

The widening gap between GDP and GNP indicated indigenous industry had hit choppy waters and that the economy remained vulnerable to a slowdown in the United States, said Mr Alan McQuaid, economist at Bloxham stockbrokers.

The 2 per cent GNP figure probably offered a more accurate picture of the economy's underlying performance, he said.

Growth in the second quarter was driven principally by the chemicals sector, which boosted export and industrial output returns, Mr McQuaid added.

Mr Jim Power, chief economist with Friends First, the financial services provider, forecast sluggish growth next year.

He predicted GDP and GNP increases of 3.7 per cent and 3 per cent respectively.

"The economic momentum going into 2003 will be quite weak. Business capital spending remains very weak and is unlikely to see any meaningful recovery until the second half of 2003," he said.

The Minister for Finance was under pressure to implement swingeing expenditure cuts in the December budget, Mr Power said.

Outlining the Friends First quarterly economic outlook, he said the Budget deficit was likely to exceed €1 billion, forcing Mr McCreevy to "take a knife" to imprudent spending.