The economic outlook for the remainder of the year was described as positive by the Small Firms Association (SFA) yesterday, but it warned the Government to restrain public spending.

In its autumn economic statement the group warns that December's Budget would be pivotal in shaping investment policies over the next three years. The SFA called on the Government to continue with existing economic policies and to resist demands for increases in public expenditure.

Any return to highly expansionary budgeting would have a very negative impact on business investment, the association said.

"Necessity, quality and value for money are the benchmarks the next Minister for Finance must use for any increases in public expenditure," said SFA director Mr Pat Delaney.

"The major challenge now is to limit the pick up in our inflation rate. As an open economy Ireland is more exposed than most to competitive pressures. Ireland is operating within a single currency area where inflation is likely to remain around 2 per cent for the foreseeable future and we are facing intense competition, particularly from Eastern Europe, China and India. It is therefore imperative that we keep cost and price pressures under control," he said.

The group said small businesses would create 36,238 new jobs in 2004 as demand for labour increased by 5.6 per cent.

"This outlook reverses a five-year trend of falling labour demand and demonstrates that small business will respond to more positive market conditions. Low interest rates, some wage moderation and lower inflation have all contributed to putting small business back into a mindset of investment. This is a remarkable turnaround from 2003 when employment prospects dropped to a 10- year low," said Mr Delaney.

The SFA expressed significant concern about the impact of energy costs on businesses, especially in the light of an ESB application for a total increase in prices of over 12 per cent.

Meanwhile the other small business organisation, ISME, said a survey it had completed on business confidence confirmed that SMEs continued to be more optimistic about the future.

"The trend in business confidence continues to rise, with 42 per cent of companies more optimistic about business prospects than 12 months ago, representing a net 9 per cent increase on the previous quarter and a hugely significant 67 per cent increase year-on-year, a marked turnaround in the last 12 months," said Mr Mark Fielding, chief executive of ISME.

"Moving forward, employment prospects continue to be positive, with a quarter of companies expecting to employ more in the next 12 months, with a net 19 per cent increase in services and 23 per cent in distribution."