Ireland's economy should grow faster in the next five years than that of any other OECD state, the organisation said yesterday.

But the Paris think-tank said the social partnership model underpinning the national pay agreement should be modified and warned inflation would exceed the euro-zone average for some time.

While the global economy is likely to recover in the coming months from the downturn it has been experiencing since the autumn, the OECD says the Republic's expansion has already peaked.

It predicted GDP growth this year would fall to 7.75 per cent from 11 per cent in 2000. Average GDP growth in the EU this year would be 2.6 per cent.

The slowdown was attributed to weaker demand in the US for Irish high-tech exports and slower manufacturing growth. Growth would be fostered by a rapid rise in labour force participation and productivity.

Risks were "more balanced" than in the recent past, although a marked correction in the housing market would lead to weaker consumption.

The OECD said there was a more general risk that the economy would not slow to a sustainable level. This could lead to a surge in wage demands and a sharper, more disruptive correction in the future.

Still, a medium-term analysis in the OECD's latest Economic Outlook report forecast Irish GDP to expand by about 6.8 per cent each year from 2003-2006.

It predicted annual GDP growth of 2.4 per cent in the same period for Germany, France, Britain and Italy and 3.6 per cent in the US.

On partnership, the OECD said the model should evolve towards "general principles" guiding pay. To avoid further pressure on fully employed resources, it said Budget surpluses should be maintained at a high level in relation to GDP.

The OECD said: "Fiscal policy should not be committed to meeting targets for aggregate net take-home pay. The social partnership needs to evolve toward setting general principles guiding pay determination rather than pre-committing fiscal policy."

Figures close to the Government's economic thinking are understood to have expressed surprise at these remarks.

The Minister for Finance, Mr McCreevy, said wage moderation and tax reform were fundamental to the State's economic performance.

He added: "The best way for this economy to remain competitive is through the social partnership model. The Government has signed up to the Programme for Prosperity and Fairness and we remain firmly committed to the process."

On the Republic's high inflation rate, subject of a rebuke last year by the European Commission, the OECD said consumer price rises would remain above the euro-zone average.

Despite the calming impact on inflation of lower oil prices and a strengthening euro, rising wages in a tight labour market were prompting rapid price rises for services. Wage increases were outpacing productivity growth in the sector by 9 per cent.

IBEC director Mr Brian Geogheghan insisted there was scope for more tax reductions.

He said: "The most dangerous threats to competitiveness come from cost increases generated internally, including this year's alarming 20 per cent increase in current public spending and the 17 per cent rise in public service pay costs."

Ulster Bank's chief economist Mr Aziz McMahon said: "Cutting taxes may be better than having a surplus consumed by the public sector wage increases like we're seeing. The reality is that the Government doesn't seem to have any real ability to resist those wage demands."

The text of the OECD economic outlook for Ireland is available on The Irish Times website at www.ireland.com