Economic growth is set to slow down this year and again next year, according to the latest report from the Economic & Social Research Institute (ESRI). It forecasts a growth rate of 7.25 per cent in 2000 and 6 per cent in 2001, following 7.5 per cent last year.

At the same time, it predicts in its latest quarterly bulletin that the unemployment rate will have fallen to about 4.25 per cent by the end of 2001.

The only cloud on the horizon, according to the ESRI, relates to inflation. Figures released by the Central Statistics Office yesterday show that wholesale prices were rising at 5 per cent year-on-year at the end of February compared with 5.4 per cent in January.

According to the ESRI, consumer price inflation will average 4 per cent over this year and moderate to 3 per cent in 2001. This moderation is based on oil prices falling back and the euro strengthening. If they do not do so, inflation could accelerate even further.

According to Mr Kieran Kennedy, one of the authors of the report, monetary union means that most goods will not inflate in price. The worry, he said, was inflation in the cost of services and asset prices.

Keeping a lid on domestic pressure, including sheltered sectors such as legal costs and taxis, is important, according to the ESRI. It also warns that further tax cuts will merely serve to fuel inflation and push house prices up to an extent that will make a crash more likely.

The ESRI says the wage increases provided under the draft Programme for Prosperity and Fairness seem "reasonable". It notes that, in the absence of an agreement, market forces might well deliver similar increases, though the process of local bargaining "could be more painful and wasteful of resources".

Living standards are expected to continue improving after a rise of some 6.75 per cent in 1999.

The outlook for the rest of this year and next is for continuing growth in the economy but at a slower rate, as capacity constraints begin to bite.

The economy will be supported by a boost to world economic activity in 2000 compared with 1999. Exporters should benefit from the upturn in demand in these markets, while international foreign investment flows will remain high with the Republic remaining an attractive location. But a slowdown is still on the way. According to the ESRI, the very competitiveness of the economy means domestic firms face buoyant orders and foreign firms continue to see Ireland as an attractive location from which to serve the growing EU market. "The problem will be shortage of capacity."

Labour supply resources are now almost exhausted and the potential rate of growth is much more limited.