Economic growth in the Republic will slow sharply this year before rebounding in 2003, according to the European Commission's Spring Economic Forecasts. The Commission expects the economy to grow by just 3.5 per cent in 2002 and by more than 6 per cent next year.

The forecasts, which were published in Brussels yesterday, predict that unemployment will rise to 4.5 per cent this year and will remain at similar levels for the medium term.

The Commission suggests that private consumption will fuel the recovery, partly on account of recent tax-relief measures and the low level of interest rates. "In line with the most recent budget, public consumption and investment are also forecast to grow strongly.

"Private house-building activity is likely to benefit from stimulatory measures in the budget, while growth in equipment investment is expected to recover into positive territory as a result of improved economic prospects," the forecast says.

Inflation is expected to rise to 4.5 per cent in 2002 but fall to 3.3 per cent next year. But the Commission warns that big pay increases could knock this inflation forecast off course.

The forecasts are upbeat on economic prospects for the euro zone but the Commission urged Germany, France, Italy and Portugal to take further steps to balance their budgets. The Commission warned Germany and Portugal earlier this year that their budget deficits were perilously close to the limit of 3 per cent of GDP laid down in the Stability and Growth Pact. The Commission expects the US economy to grow by 2.7 per cent this year, more than five times faster than the rate of expansion it predicted for the US in November. Economic and Monetary Affairs Commissioner, Mr Pedro Solbes, said stronger US growth could mean that the euro-zone economy would grow faster than expected. "Barring a surge in oil prices, the recovery in the euro area could be even stronger than expected."

Introducing the forecasts in Brussels yesterday, Mr Solbes said they confirmed that the economic slowdown in the euro zone had been shorter than expected and was now over. "I would say that our forecast confirms the wider perception that exists among international financial institutions and private market forecasters that for Europe the slowdown is over, recovery has begun and we can look into the future with optimism," he said.