The Irish economy will contract by 1.3 per cent in 2010, a new report from PricewaterhouseCoopers (PwC) said today.
However, the economy will return to growth in 2011, expanding 1.8 per cent.
The report notes Ireland experienced a "substantial contraction" with output in the third quarter of 2009, which was slightly lower than the level in the fourth quarter of 2005.
Investment activity will decline "significantly", the report said, with the housing sector feeling the effect particularly due to a considerable overhang of new unsold housing. Tight fiscal policy will also weigh on growth.
"The Irish economy remains challenging and this year is likely to see continuing weakness in activity and employment," PwC said today.
"Concerns about private and public debt are likely to restrain the scale of any emerging improvement. However, the corrective action taken by the Government, designed to stabilise the Irish deficit in the last budget, has gone some way to restoring confidence on the international markets."
The report said it was likely that the worst had passed, and noted a sense of "cautious optimism". However, recovery would be "gradual and modest".
"Export led growth and a strong focus on innovation will be vitally important for Ireland's economic recovery," said PwC Ireland's Ann O'Connell.
"At the same time a strong focus on our pipeline of foreign direct investment will be critical since consumer and government spending are likely to be constrained for some years to come. Finally, businesses and Government need to continue to work hard to restore our national competitiveness and reposition Ireland as a prime location of choice in which to invest and do business."
The euro zone economy would see a modest expansion in economic output of 1 per cent in 2010, PwC said, with stronger growth expected in 2011.
