The Economic and Social Research Institute has warned that a weakening in the US and British economies could undermine Ireland's fragile economic recovery.
It has also urged the Government to cut the deficit in the December Budget by more than the €3.6bn required by the European Union-International Monetary Fund programme.
In its latest commentary, the ESRI also said action on reducing costs and prices, rather than cutting wages, would help to boost economic growth by improving competitiveness.
The institute believes the international economic situation has become more challenging because of a slowdown in the US and British economies and disappointing growth in the eurozone, which are Ireland’s three main export markets.
Nevertheless, it said GDP could grow by 1.8% this year, while GNP, which strips out multinational profits, could grow by 0.2% this year and 0.7% next year.
The growth would be linked to more indigenous firms growing their export business to compensate for a lack of demand at home.
The ESRI said the July deal on reducing the costs of the EU-IMF bailout funds was very positive for Ireland.
It claims that because less money will be needed for interest payments, the deficit should fall faster under existing plans.
Minister for Finance Michael Noonan has told the Oireachtas Finance Committee that the stated scale of adjustment of €3.6bn might "stretch out a bit".
Mr Noonan said the growth forecast of 2.5% for 2012 might have to be revised downward as a result of international factors, but he said at the moment it is too soon to call.
SIPTU President Jack O'Connor has criticised the proposals to cut more than €3.6bn.
He said: "Of the limited options available, intensifying austerity at this point would be the single worst thing we could do. It would further retard our anaemic growth prospects.
"The focus now must be on jobs and growth. This is the key to recovery and it is also, incidentally, the key to building confidence in international markets."
