Jobs growth is forecast to slow markedly this year as the impact of higher interest rates hits home, State employment agency Fás said yesterday.

In its quarterly labour market commentary, Fás said employment is expected to grow by 2.8 per cent - or 57,000 people - in 2007, compared with 4.3 per cent last year.

Ireland's labour market continued to outperform the rest of the euro zone last year. By the end of 2006, employment had grown by 85,500 to 2.07 million and the unemployment rate was down to 4.1 per cent, its lowest in five years, with the number of unemployed falling 2,600 to 88,700.

Labour demand was so strong in 2006 that not even migration from the enlarged EU was sufficient to fill all the new jobs. A total of 17,000 workers from countries outside the EU were employed in Ireland last year.

Immigration from the 10 EU accession countries has helped to ease labour shortages, according to Fás. However, the latest figures show the inflow of EU accession state migrants falling by 8 per cent year-on-year for the December-February period.

"It remains to be seen whether this signals the beginning of a longer-term slowdown in the rate of inflow," the report said.

The report says the inflow from two new EU members, Romania and Bulgaria, could be significant. About 5,000 PPS numbers were issued to Romanian migrants in the first two months of this year.

The Fás report notes that more than half of last year's jobs growth was accounted for by the services sector, where employment grew by 52,500 to nearly 1.38 million.

The main feature of recent sectoral employment trends has been the dominance of the non-traded sectors, according to Fás.

There are now almost as many people employed in construction as there are in the manufacturing sector - at the turn of the decade the ratio was 1:2. "However, the reliance on the construction sector, which accounted for almost a third of the new jobs, is a cause of some concern, given that interest rate rises, both recent and anticipated, are likely to subdue housing demand in the short to medium-term," said Fás economist Brian McCormick.

The manufacturing sector showed tentative signs of a recovery in 2006, increasing by almost 4,000 year-on-year to 292,100 in the fourth quarter.