A very expansionary fiscal policy, exceptionally low interest rates and a weak euro exchange rate are all supportive of economic growth

The latest data confirm that there was a sharp slowdown in the pace of activity in the Irish economy during 2001. GDP growth slowed from 12.7 per cent year-on-year in the first quarter of 2001 to 9.4 per cent in the second quarter and 3.2 per cent in the third.

This slowdown was not evenly distributed across the economy, however. As in the US and British economies, growth in consumer spending was quite strong in 2001, increasing by some 5 per cent year-on-year during the opening three quarters of the year.

Irish consumer spending strengthened further in late 2001, ahead of the changeover to euro notes and coins. Meanwhile, Government spending showed relatively strong growth of around 6 per cent last year. Construction output also grew strongly through last year, buoyed by a big rise in public capital spending.

However, there was a sharp downturn in export growth and business investment during 2001. Export growth slowed from 21.5 per cent year-on-year in the first quarter to 5.3 per cent year-on-year in the third quarter.

Meanwhile, there was a marked downturn in investment in machinery and equipment last year. It showed a decline of 25 per cent year-on-year in the third quarter as businesses scaled back on capital expenditure.

The decline in business investment and exports reflects a marked weakening in industrial activity. The level of manufacturing output in the last quarter of 2001 was 6.2 per cent lower than in the opening quarter of the year.

Output of goods in the information and communications technology (ICT) sector fell particularly sharply, declining 22 per cent year-on-year in the final quarter of 2001. This fall in manufacturing output, especially in the ICT sector, reflects the trend in the global economy last year, most notably in the US and Britain.

Not surprisingly, the slowdown in the economy is reflected in the latest data on the labour market. The Live Register has increased by 20,000 in the past six months. Meanwhile, employment growth slowed to 2.5 per cent year-on-year in the fourth quarter of 2001, down from 3.6 per cent in the opening quarter of the year.

Industrial employment actually fell in 2001's final quarter from year earlier levels, while service sector employment rose 3.4 per cent year-on-year. The strong rise in service sector employment reflects the robust growth of consumer and Government spending.

Overall, what the data show is the emergence of a two-tier economy in the Republic during 2001, with the industrial sector faring badly but other sectors performing quite well. Again, this mirrors the trend in the US and Britain during last year.

Irish GDP growth looks to have weakened further in the final quarter of the year, with export growth in particular, turning negative on a year-on-year basis. Hence, the economy entered 2002 with little momentum. Thus, even with activity picking up pace over the course of the year, the average growth rate for 2002 will be relatively subdued.

Most leading indicators point to a strengthening of economic activity this year. Even in the hard-hit manufacturing sector, both the Purchasing Managers Index and the production expectations component in the IBEC/ ESRI industrial surveys have picked up strongly in recent months.

Indeed, the latest Central Statistics Office data show a large rise in manufacturing output in December and January. Meanwhile, there has been a sharp rebound in new housing registrations from their November lows. HomeBond registrations posted an increase of 35 per cent year-on-year in the three months to February.

Furthermore, in February new car registrations recorded their first year-on-year increase since mid-2000. Total tax receipts also rose by 9 per cent year-on-year in February, having weakened considerably during the past year. Evidence of a renewed pick-up in economic activity in the Republic is in line with recent trends pointing to a rebound in global growth, most notably in the US.

Domestic economic conditions are also favourable. A very expansionary fiscal policy, exceptionally low interest rates and a weak exchange rate are all supportive of economic growth.

A return to strong year-on-year GDP growth rates, however, is unlikely to become evident until the second half of this year, given the high annual growth rates registered in the first half of 2001, when GDP increased by 11 per cent year-on-year.

Therefore, for 2002 as a whole, we believe GDP growth will average no more than 3.5 per cent, despite a marked strengthening of activity during the year. This compares with estimated GDP growth of 6.75 per cent in 2001 and 11.5 per cent in 2000.

It would be the lowest growth rate achieved by the economy since the early 1990s. However, GDP growth in 2003 should be considerably higher, averaging around 6 per cent.

Oliver Mangan is chief bond economist with AIB Group Treasury