The Economic and Social Research Institute has said the economy, measured by GNP, will grow by 2% this year and forecasts growth of 2.7% next year.

It said the domestic economy has grown for the first time since the economic crisis began. Recent data on employment growth and tax returns has led it to lift its forecasts.

In its latest quarterly outlook, the ESRI said domestic demand will contribute to overall growth for the first time since the crisis began.

It said this is a portent of a stronger recovery in 2014 and 2015.

Along with domestic recovery, there has been a continued robust performance of the export sector.

The outlook assumes a return to solid growth in the rest of the EU next year will help. The ESRI said a failure of EU growth is the main risk factor for Ireland.

Because of distortions caused by some high value pharmaceuticals coming off patent, the ESRI said the best gauge of activity in the Irish economy this year is GNP, which it forecasts will grow by 2% this year and 2.7% next.

The ESRI believes this will also lead to an out-performance in public finances next year.

It forecasts the deficit coming in at 4.4%, well below the Government target of 4.8%, which raises the prospect of a slightly easier Budget in 2015, if growth and employment levels materialise.

Speaking on RTÉ's Morning Ireland, ESRI Senior Research Officer David Duffy said strong growth in employment and improved investment is contributing to the positive outlook.

Noonan welcomes report

Minister for Finance Michael Noonan has described the latest quarterly review as "very good news".

He said: "It gives us a sense of confidence going into 2014."

However, Mr Noonan said the Government would not revise upwards its growth projections on foot of the ESRI estimate of 2.7% in 2014. 

He said: "There are a lot of forecasts around. But the ESRI's is underpinned by very careful economic analysis. It's good news but the Government will stick to its budget figure of growth of 2%."

Merkel hails first successes in eurozone crisis

Elsewhere, German Chancellor Angela Merkel said in a speech in parliament this morning that the eurozone crisis had not yet been overcome, but the first signs of success are evident, especially in countries such as Ireland and Spain.

Speaking a day after being sworn in for her third term, Ms Merkel also called for European member states to commit to binding economic reform contracts, saying the founding flaws of the single currency union need to be addressed urgently.

"Clearly the eurozone debt crisis is not yet overcome. One cannot emphasise this often enough. But we are seeing first successes and we are convinced it can be overcome permanently," she said in the Bundestag chamber.

Ms Merkel said she did not believe the necessary changes to European structures could be implemented without changes to the EU treaty.