Paris-based think tank the OECD has warned that there is a possibility that the downturn in the Irish housing market could worsen.

It has also warned that economic growth will be well below trend at 1.5% this year.

In its latest Economic Outlook, the OECD said that the impact of the housing market correction on the rest of the Irish economy could be more severe than anticipated.

As a result it said it is important that external competitiveness of the economy is improved so that new markets can be found for Irish goods and services abroad.

It points out, however, that the recent appreciation of the euro against the US dollar and sterling as well as the weakness of demand in both the UK and the US could have a more negative effect on exports and foreign direct investment than anticipated.

The report also warns that Ireland is particularly exposed to an international slowdown in financial and business services because of its specialisation in these areas.

The OECD also highlights the deterioration in Ireland's public finances and predicts that the Government's deficit next year will be 2.6% of GDP, which is very close to the borrowing limit set out in the EU Stability and Growth Pact.

The report says Government spending growth needs to slow substantially and warns that it is important the Government avoids locking-in further expensive commitments, particularly on public sector pay.

In these circumstances the OECD says it will become even more important to get value for money for public expenditure.

The report says that wage restraint will be required in the shorter run to help maintain competitiveness.

It also calls for stronger competition throughout the economy, for education standards to be raised further, and for more to be done to increase female participation in the labour force.