The European Commission has cut its growth forecasts for Ireland next year by half a percentage point in a draft document seen by Reuters.

The commission, part of Dublin's troika of lenders overseeing an €85 billion bailout, said it expected gross domestic product (GDP) to grow by 1.4 per cent in 2013 and not the 1.9 per cent predicted in May.

It also lowered its forecast for this year slightly, to 0.4 per cent from 0.5 per cent, as Ireland's open, export-driven economy braced itself for a tougher year than 2011 when it grew by a higher-than-expected 1.4 per cent.

"The outlook for external demand has deteriorated somewhat since the finalisation of the last review, particularly for next year," the commission said in its latest review of Ireland's bailout programme, circulated among some TDs ahead of its discussion at EU level.

"Commission Services have revised down export growth for 2013 from 4.2 per cent to 3.5 per cent as a result. A slightly larger contraction in domestic demand in 2013 is also foreseen, due to higher-than-expected unemployment and flat earnings."

The Government has pencilled in GDP growth of 2.2 per cent for next year and could face another 12 months of downward revisions after it was forced to lower its forecast for 2012 three times in as many updates, the last coming in April.

The commission said growth was expected to reach 3 per cent in the medium term, a pace it described as essential to buttress the sustainability of public and private debt as well as the recovery in banks' profitability, the lack of which remained "a source of concern".

The forecast cut raises fresh doubts as to whether the economy can grow fast enough to service large debts. Ireland, which returned to long-term bond markets ahead of schedule last month, has avoided joining most of the euro zone in recession but needs growth to accelerate to tackle debt set to peak close to 120 per cent next year.

Looking ahead to 2014 and 2015 for the first time, the commission sees GDP growth of 2.5 per cent and 2.8 per cent respectively, similar to government projections as it predicts unemployment will fall to a still-high 13.1 per cent from 14.8 per cent this year.

The commission said Ireland would nevertheless reduce its budget deficit to within the target of 8.6 per cent of GDP this year because of last year's better-than-expected growth and a cutting of the shortfall that was sharper than forecast.

It did, however, express frustration at expenditure overruns in social protection and particularly health, saying they suggested that spending pressures were mounting ahead of another tough austerity budget in December.

"All the interlocutors of the mission agreed that there are no low hanging fruit left, and the needed consolidation efforts are likely to require difficult political choices," the report said.

After Ireland brought to €10 billion the amount it has sliced off its post EU-IMF bailout borrowing needs following the issue of new debt this month and last, the commission said the strong demand showed Dublin was in line to achieve its market funding objectives provided its programme stayed on track.

However it said this alone may still not be enough to secure a sustained return to market funding if the global backdrop fails to improve or deteriorates further and that an improvement in the terms of Ireland's bank bailout, currently being discussed at EU level, would greatly help this.

Reuters