The Republic's economy has grown by 3.5 per cent this year, with expansion of 3 per cent likely in 2003, according to Friends First chief economist Mr Jim Power.

In a paper released yesterday, Mr Power said potential growth in 2002 had been curtailed by a slowdown in consumer spending and difficulties in the export market.

"The animal spirits of the Irish consumer took a bit of a dampening after a five-year spending binge," he said.

He described 3.5 per cent GDP growth as "respectable" but noted it was "a far cry from the average annual growth rate of 9.5 per cent in the second half of the 1990s."

Mr Power sees several causes for concern about the Irish economic outlook. He believes consumers will curtail spending as they worry about job prospects and income, noting that real spending power will be drained by "stealth taxes" contained in this month's Budget.

He expects business spending to be damaged by rising costs, a stronger euro and weak export demand.

In this "testing environment", GDP growth in 2003 will go no higher than 3 per cent, according to Mr Power.He said the euro-zone economy as a whole was likely to have grown by 0.8 per cent this year, with the US expanding by 2.5 per cent.

"The prospects for a significant improvement on these dismal growth performances in 2003 are not terribly compelling," Mr Power said.

He added that economic problems are "starker" in the EU than in the US, with the German economy still the source of most worry. Current political and economic policies in Germany are not appropriate for a state requiring stimulus, according to Mr Power.

He believes the European Central Bank will be pushed to cut rates by a further 0.5 per cent in the first half of next year as it relaxes its approach to inflation.