Economic growth is likely to slow down significantly next year, as the impact of the international slowdown affects Ireland, according to the latest ESRI quarterly report.

However, it still believes that growth will remain well above the EU average and that employment growth will remain strong, as the economy moves down from the record rates of the last couple of years to a more sustainable rate of expansion.

The ESRI is predicting that Gross National Product growth will slow to 5.5 per cent in 1999 from 8.25 per cent this year. However, it predicts total employment will rise by 43,000 next year, and the inflation rate will fall back only slightly to 2.25 per cent from 2.6 per cent in 1998.

The institute has revised up its estimates for the economy in 1998, saying that the international financial crisis had had less impact than expected - at least to date. However, the on-going crisis has the capacity to reduce the growth rate in 1999 through loss of markets, increased competition and an easing of investment flows, it states.

The "near stagnation" of the British economy will also have a large impact, as will the lagged effects of the prolonged over-valuation of sterling.

Nevertheless, the prospects look favourable for a smooth transition to a sustainable growth rate in 1999.

However, the report warns that there is a danger of a large loss of competitiveness through excessive pay increases.

"If rapid long-term growth is to be maintained, Irish pay settlements need to be only a little higher than those in the other euro countries," the report warns.

It also points to the "less obvious but nevertheless real" risk of alienating our fellow members of the EU by pursuing too wide a range of policies perceived by them as inappropriate for a country close to EU average income levels.

"An ordering of our own priorities in relation to our European partners appears to be a sensible precaution, while greater efforts are probably needed to educate our neighbours about specifically Irish economic realities."

It also recommends that the essential elements of the strategy, such as low rates of corporation tax, be separated from others, such as the gaining of an extra tranche of structural funds or even the prolonging of duty-free sales within the EU.

Overall, the ESRI is predicting that the total number at work will have increased by about 74,000 in 1998 - the latest CSO figures showed a 95,000 rise in the year to last April. When allowance is made for the proportion of part-time workers in the total, the annual rise in full-time equivalent employment is estimated to be just under 4 per cent.

However, because of a slowing in economic growth in 1999, employment will increase less rapidly next year than in previous years, or by about 47,000 jobs.

It is also predicting that non-agricultural earnings will increase by 6.25 per cent this year.