Oct. 7 (Bloomberg) -- Ireland's economy will expand less than previously forecast this year and next as export growth wanes, the government's independent economic adviser said.

The economy will grow 5.7 percent this year and 5 percent in 2006, the Dublin-based Economic and Social Research Institute said today. That compares with a July forecasts of 6 percent and 5.1 percent. The economy expanded 4.5 percent in 2004.

In the U.K., Ireland's second-biggest export market after the U.S., the economy expanded at the slowest annual pace in more than 12 years in the second quarter. The European Central Bank yesterday kept interest rates at a six-decade low for a 28th month to foster growth in the 12-nation euro region.

``The U.K economy is now performing less well than in recent times,'' the institute said in its quarterly commentary. ``Hopes of a sustained recovery in Germany were dealt a blow by the inconclusive election results.''

Germany's Sept. 18 election failed to produce a decisive majority, and Chancellor Gerhard Schroeder and opposition leader Angela Merkel are trying to agree on a coalition government.

Irish exports will climb 4.8 percent this year and next, the institute said, reducing its July forecast of 5.7 percent and 5.6 percent, respectively. Overseas sales of products ranging from Pfizer Inc.'s Viagra to Microsoft Corp.'s software account for about 80 percent of Ireland's $180 billion economy. Exports rose 6.7 percent last year.

Consumer Spending

The economy, spurred by consumer spending, still is the fastest growing in the euro region. Consumer spending will increase 5.5 percent this year and 5.8 percent in 2006 after growing 3.8 percent in 2004, according to the institute.

``The economy is still very healthy,'' said Alan Barrett, who prepared the report, at a meeting with reporters yesterday. ``The labor market is phenomenally strong.''

Unemployment will drop to 4.2 percent this year and next from 4.4 percent last year, the institute forecast. Axa Assistance, a unit of Axa SA, Europe's second-biggest insurer by premiums, said on Sept. 21 it will hire 300 workers at a customer support center in Ireland over the next five years.

Against the backdrop of accelerating economic growth and rising employment, inflation will quicken this year to 2.3 percent, and to 2.5 percent next year, from 2.2 percent in 2004, the ESRI forecast.

To contact the reporter on this story: Dara Doyle in Dublin at ddoyle1@bloomberg.net.

Last Updated: October 6, 2005 19:09 EDT