The economy will slow down markedly this year, according to the latest predictions from AIB.

Writing in the banks latest monthly bulletin, bond economist Mr Oliver Mangan, said he expected a "marked deceleration" in the pace of growth this year to 7 per cent from 9.5 per cent in 1998. This is mostly due to a much less favourable external environment as economic growth has slowed sharply in the two main export markets. In the UK GDP growth is expected to be around 1 per cent this year compared with 3.5 per cent in the years 1994 to 1998. The euro zone economy is expected to expand by just 2 per cent in 1999.

He added that there were also signs that the economy was hitting capacity constraints, particularly in the labour market where the unemployment rate had fallen from 16 per cent to 6 per cent of the labour force over the last six years.

There are also signs that constraints are inhibiting housebuilding activity and the transport system is struggling to cope.

Mr Mangan also pointed to risks to the inflation environment particularly rising wage pressures, the weakening of the euro and the rebound in oil prices.

"Skilled shortages are likely to fuel wage inflation in the private sector especially in construction and high-tech manufacturing," Mr Mangan noted.

He also predicts a growing budget surplus expected to rise by more than 2 per cent of GDP this year as tax receipts remain buoyant.