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by David Elkin

The Central Bank has raised its forecasts for the Irish economy this year, though it warns that unemployment will not start falling until next year, with exports remaining the key driver of Irish growth, according to its latest quarterly economic bulletin released today.

• To download the full Quarterly Economic Outlook from the Central Bank click here

Following a sharp contraction last year, the Bank says that domestic demand has continued to decline this year, albeit at a moderating rate. World demand, however, has been somewhat stronger than expected this year. The bulletin also highlights a drop of 30% in investment expenditure in the domestic economy.

The report expresses concern that high debt levels in many countries and continuing worries in financial markets could slow, or even de-rail, the international recovery.

Consumer expenditure dropped sharply at the beginning of last year and has remained on a moderating downward trend since, reflecting fragile consumer confidence and weak disposable incomes.

The contraction in output over the last two years has led to significant employment losses in virtually all sectors of the economy, according to the report.

Commenting on the impact of inflation on the domestic economy, the report continues, "The impact on inflation of both higher internationally traded commodity prices and the euro depreciation against sterling will likely be mitigated by weak domestic factors such that overall inflationary pressures are likely to remain muted during much of 2010."

The bank's quarterly bulletin forecasts that the Irish economy, as measured by gross domestic product, will grow by 0.8% this year, though gross national product will fall by around 1%. GNP excludes profits made by multi-national companies here. These forecasts are better than the bank's previous forecasts in April.

The bank is forecasting growth of 2.2% to 2.8% in both measures next year.