The Central Bank said today the growth prospects for the economy were good but that the recent downturn in the US economy and a worsening of the foot-and-mouth crisis may force a downward revision in its growth forecast.
The bank expects the Irish economy to grow by about 7 per cent this year, and inflation should average at 4.5 per cent this year if the fall in the oil price and the recovery of the euro is sustained.
It also said the impact of foot and mouth could knock at least a percentage point off GDP this year if the crisis does not escalate.
Exports will be particularly hit by the global downturn. The volume of exports is expected to grow by about 11.5 per cent this year compared to 20 per cent in 2000 due to falling international demand for computer software.
The rate of economic growth will also slow due to a tightening labour market and a subsequent increase in average wages, the bank said. Average earnings are expected to grow by 10 per cent this year - four times the European average.
Commenting at the publication of the Central Bank's quarterly bulletin today, Central Bank assistant director general Mr Michael Casey said the rate of wage inflation is seen with "some concern" by the bank. Mr Casey said it was time for a "reality check" in wage growth.
"In the event of a recovery in the euro, the gap between Irish wage inflation and that of our main trading partners could create difficulties," the bank said.
It warned that Irish firms in old economy sectors such as food and textiles where productivity increases are harder to achieve, would be particularly vulnerable.