The North's economic outlook remains positive, but certain sectors such as farming and agri-food face serious problems, according to a new report.

The Review and Outlook for the Northern Ireland Economy, from First Trust Bank, also warns that the tax differentials between the Republic and the North, along with sterling's strength, mean the North faces serious competitive issues.

The report says it is imperative that Northern Ireland lower profits tax rates and unless British profits tax rates veer towards 12.5 per cent, the North in particular will face even more severe competition for industrial development.

It says the British Treasury is most unlikely to agree to a unilateral profits tax break for the North, against the interests of Britain.

"The Northern Ireland Assembly, however, can ask for varying powers, similar to those available to the Scottish Parliament, to be devolved to it," the report says.

"If such tax varying powers were devolved, we could debate whether to increase personal income tax rates by 2 per cent and to use the revenues in a fiscally neutral way to lower profits tax from 20 per cent to 15 per cent, or even lower," it says.

The report's authors believe the British Treasury may be less hostile to tax "trade offs such as this", than to requests for straight subventions.

The report says the indirect tax differentials between the North and the Republic have widened dramatically over the past two years and along with sterling's strength against the pound have created a huge competitive dilemma for many Northern businesses.

Acknowledging that the indirect tax issue - especially along the Border - is a complex issue, First Trust says it could be eased at an early stage by the North-South Ministerial Council. "Clearly it is not in the interests of long-term sustainable co-operation between Northern Ireland and the Republic to allow such a huge trading obstacle to remain."

The report says the new political structures offer exciting opportunities for local policymaking and local responses to difficult local economic issues.

"It has been clear for some time that the prevailing political system of Direct Rule was struggling to come to terms with many local economic issues."

Despite some gloom, the report is upbeat about the overall economy, saying the local labour market has tightened further, despite closures and redundancies in the textiles, clothing and food sectors. "Employment remains at all-time high levels with all the increases in jobs occurring within the private service sector," it says. It also says manufacturing employment has held up remarkably well with openings and expansions in pharmaceuticals, engineering and electronics offsetting the closures.

It says the North's output performance has been encouraging compared to Britain's. "The one worrying feature is that it may conceal a poor productivity performance," it says, adding that in Britain manufacturing employment has been falling steadily, yet output has remained stable. "The Northern Ireland situation is one of stable or rising employment and rising output, implying perhaps, less rapid productivity growth," it says. The report forecasts GDP growth of at least 3 per cent next year.