The economy grew strongly last year, reaching its fastest rate of expansion in five years, according to the Central Statistics Office (CSO).

Adjusting for the effect of inflation, gross national product (GNP) - economic output produced by Irish-owned economic agents - grew by 5.4 per cent last year, up from 4 per cent in 2004.

However, preliminary CSO estimates, published yesterday, also show that growth was strongly dependent on domestic activity, with the external side of the economy performing poorly.

Minister for Finance Brian Cowen welcomed the figures as a sign of strength in the economy. But business lobby Ibec said the economy was over-dependent on consumer activity and losing productivity and competitiveness.

Gross domestic product (GDP) - which includes output of foreign agents in the State but excludes output from Irish agents outside it - grew by 4.7 per cent, up from 4.5 per cent in 2004.

Both personal consumption and investment activity accelerated last year, overcoming a negative contribution from the external side of the economy.

Personal consumption on goods and services grew by 5.6 per cent, up from 3.8 per cent in 2004, while investment activity accelerated from 8 per cent in 2004 to 13 per cent in 2005. A CSO spokesman attributed the strong investment outturn to construction activity and the purchase of transport equipment.

"Building activity grew by 8.7 per cent, while investment in machinery and equipment grew by 22 per cent.

"When the large aircraft purchases last year are accounted for, machinery and equipment purchases still grew by 15 per cent," Paddy McDonald of the CSO said yesterday. Ryanair last year placed an order for over 80 short-haul Boeing aircraft.

The performance of the external economy contrasted with its domestic strength, with imports expanding by 4.6 per cent, compared to export growth of 1.8 per cent. This contributed to the deficit on current account reaching its highest recorded deficit level of €3,079 million last year. As a percentage of GNP last year's current account deficit was the largest since 2006.

Analysts yesterday laid emphasis on the importance of the domestic economy in driving growth. "Exports increased at their slowest pace since the 1980s [ excepting 2003 figures affected by VAT fraud], but import demand was robust due to healthy consumer spending and machinery and equipment investment," Davy economist Rossa White said.