The Central Bank has cut its forecasts for economic growth in the wake of the terrorist attacks on the US.

The Bank, which had been forecasting Gross National Product (GNP) growth of 4.5 per cent next year, now expects economic growth to slow to 3.5 per cent or less in 2002, as the international downturn takes its toll. This compares to an expected growth rate of 6 per cent this year and 10.4 per cent in 2000.

"The US economy was already showing signs of a weaker-than-expected performance in the second half of this year even before these attacks," the bank said.

"The impact of the attacks is likely to undermine the short-term outlook further."

However, in its autumn bulletin, the Bank cautioned that its forecasts were "preliminary" as the precise effect of the attacks on US consumption was not yet clear.

If the impact on world trade were greater than forecast, for example, and accompanied by a sharp appreciation of the euro and an increase in oil prices, the negative effect on the Republic could be even greater, it said.

Tourism and travel from the US are likely to be hardest hit, with a knock-on impact on the Irish tourism sector which accounts for around 4 per cent of GNP, the Bank noted. Residents of North America contributed around €698 million (£550 million) to the Irish economy last year, it said.

"The evidence from previous events such as the Gulf War indicates that these receipts are likely to be very substantially reduced and that the impact could last for a number of years."

However, the bank said that while it expected the slowdown to be "fairly deep", it did not envisage that it would last too long - or that the Republic would face a recession.

"There is a fundamental resilience in the US economy, an entrepreneurial spirit that's still there," the Bank's assistant director-general, Mr Michael Casey, said. "Barring some unforeseen calamity, it will recover fairly quickly."

He also said that a slowdown could serve as "a useful reality check" for the Irish economy, which could not sustain the strong growth rates of recent years for much longer.

"Slowdowns are not the end of the world. If we keep cool heads, we can survive them quite well without any structural damage to the economy," Mr Casey said.

Looking ahead, the Bank expects employment growth to stabilise, or even go into reverse, as job losses are not compensated for by job creation.

It believes that the employment rate will rise to about 4.5 per cent next year, an increase of about 15,000 people.

Meanwhile, the Bank says it has not forgotten about inflation - which remains a concern as it continues to run at about twice the EU average. The Bank believes consumer price inflation is likely to average 4.75 per cent this year, dropping below 4 per cent in 2002. The greatest risk to inflation lies in oil prices.

A sharp rise, resulting from a threat to supplies, would more than offset the downward impact on prices of weaker growth and a stronger euro, the bank said.

It also warned that it was important that wage developments responded to the new economic situation if Irish competitiveness was not to be undermined, particularly in the case of a rise in the euro's value.

In policy terms, the bank is recommending "a broadly neutral fiscal stance" ahead of the December Budget. Automatic stabilisers should be allowed to operate fully, it said.

"This means that fiscal balances are allowed to deteriorate due to lower tax revenues and higher spending on unemployment payments, et cetera, but that the authorities do not go beyond this in terms of trying to support demand," the Bank said.

The full text of the Central Bank Autumn Bulletin 2001 is available on The Irish Times website at: www.ireland.com.