Retail sales fell sharply in January, confounding evidence that the economy was rebounding. The retail sales index fell by 4.7 per cent between December and January according to the Central Statistics Office, indicating that activity in the sector had dropped sharply.

The figure contrasted with borrowing data also released yesterday by the Central Bank. They showed that the rate of private-sector credit growth was accelerating. It rose to 14.2 per cent year-on-year in February from 13.3 per cent in January. Growth in mortgage lending also remained steady at 18 per cent year-on-year in January and in February.

"The seasonally adjusted fall in retail sales sits uneasily with the borrowing numbers and tax data," said Dr Dan McLaughlin, chief economist with Bank of Ireland.

Data on VAT and other tax receipts in January and February indicated that there had been a pick up in retail sales, he said. A clearer picture would emerge when retail sales figures for February were available, he added.

The January fall may reflect the unwinding of a number of euro-changeover related factors that artificially pushed sales up in December, said Mr Austin Hughes, economist with IIB Bank.However, even allowing for this effect, the figures were very weak, said Mr Hughes.

Retail sales in January were up 3.1 per cent on January last year, but on a volume basis - which excludes the effect of price rises - the annual increase was only 0.6 per cent.

The gloomy picture painted by the retail sale figures is at odds with anecdotal evidence that both consumer and business confidence is picking up. On Wednesday, the Central Bank cited these sentiments as being among a number of factors behind a decision to increase its economic forecast for 2002. Trade figures out this week also showed that exports grew strongly in January.

AIB Corporate and Commercial Treasury was also predicting a rebound in the economy yesterday, saying that growth would average 3.25 per cent for the year.

"Most leading indicators point to a strengthening of economic activity this year," according to AIB.

Both AIB and the Central Bank have flagged rapid growth in wages as a possible threat to economic recovery, as it will undermine the competitive position of Irish exporters. Data for hourly manufacturing industry wages also released yesterday showed they rose 12.6 per cent in the last quarter of 2001. IBEC, the employer's representative body described the increase as "unsustainable".