The Central Bank has revised downwards its economic forecasts for 2011, predicting growth in gross domestic product (GDP) of only 1 per cent for the year.
This is a "significant downward revision" from the 2.4 per cent forecast in October, the bank said.
The last quarterly bulletin was based on a budget adjustment of €3 billion. However, the Government has since said it is trying to trim €6 billion from the budget through a mixture of spending cuts and increased taxes.
Gross national product, which excludes multinational profits, is expected to be broadly unchanged this year, declining 0.3 per cent.
For 2012, the Central Bank forecast growth of 2.3 per cent in GDP, while GNP is expected to return to positive growth at about 1.5 per cent.
"While this is the bank's central scenario, a range of both stronger and weaker outcomes are, of course, quite plausible," the bank said.
"The already evident divergence in sectoral performance across the economy is set to continue, with growth likely to be largely confined to the export sector in 2011. Thus, the gradual return to overall output growth will reflect the growing contribution from the external side beginning to outweigh the still negative – albeit less so – impact of domestic factors."
Growth in Ireland's main export markets will be lower in 2011 than last year, but will still support relatively strong export growth, the bank said.
Import growth is likely to remain sluggish, however, and domestic demand is expected to be subdued as employment falls, higher taxes impact on disposable incomes and households seek to reduce their debts.
The bank predicted it will be 2012 before any return to employment growth is seen in Ireland, falling around 1 per cent in 2011 and a modest increase in 2012 of 0.2 per cent.
Fine Gael's finance spokesman Michael Noonan said it was crucial to focus on savings and public sector reforms rather than "damaging" tax hikes.
Labour's finance spokeswoman Joan Burton criticised the Government's proposals to reduce the deficit.
"Continued strength in the multinational export sector is certainly welcome, but it is not enough to offset weak consumer demand and domestic investment," she said.
"Back in 2008, Brian Lenihan said that Ireland would be the first country out of recession, but it now looks likes we could be the last one out because of Fianna Fáil's harsh fiscal medicine."
