Expectations of a return to growth rates of the late 1990s are misplaced, despite tentative indications of a recovery, Mr David Croughan, chief economist of IBEC, has warned.

Much of the optimism to date had been founded on the much better-than-anticipated performance of the US economy in the first quarter of the year, but latest indicators of consumer spending and house-building suggested that the pace of recovery was losing momentum, said Mr Croughan.

Increases in oil prices were also adding to the uncertainty worldwide, he said.

"In Ireland, while we had seen some small pick- up in manufacturing and exports in the first month of the year, there was no indication that this was a signal that we were set to resume the growth rates of the last five years," said Mr Croughan.

The emerging picture in Ireland is one of gradual turnaround, IBEC said in its April economic bulletin. But it said the recovery could still be modest as order books and employment expectations remain weak and unemployment continues to drift slowly upwards - casting some doubt on the resilience of the recovery.

Retail sales for January also remained weak, it added.

Large wage rises were conceded last year which had pushed Ireland's inflation rate up to twice the euro-zone average, said Mr Croughan.

"These cost increases were now showing up in lost competitiveness, acting as a drag on any hopes of recovery and were likely to exacerbate the rise in unemployment that had begun to emerge last year," he said.

Despite the weakness of the euro, Ireland suffered competitiveness losses against all trading partners throughout 2001, IBEC said, adding that the 12.6 per cent annual increases recorded in hourly industrial earnings in the last quarter of 2001, which resulted in a rise in the unit wage cost index of 9.5 per cent, were unsustainable.

IBEC also strongly rejected calls for more taxes on business, describing proposals by the Labour Party to raise employers' PRSI, and the Combat Poverty Agency to raise corporation tax, as both facile and dangerous.

• The Republic recorded the highest annual inflation rate in the euro zone in March, according to the latest figures from the European Union statistics office.

Irish inflation measured on an EU harmonised basis - at 5.1 per cent - was more than twice the average annual rate across the euro zone of 2.5 per cent.

That compares with an average of 2.4 per cent in February.

According to Eurostat, Ireland was followed in the inflation league by Greece and the Netherlands at 4.4 per cent and 4.3 per cent respectively.

Austria and Luxembourg posted the lowest rates in the euro zone, of 1.7 per cent. - (Reuters)