The Central Bank's latest report says the economy is likely to start growing again in the second half of this year, but only at what it calls a 'modest' pace.
Its quarterly bulletin warns, however, that lower incomes and increased unemployment are likely to continue to hold back consumer spending.
The bank also says that it will be 2011 before growth is strong enough to start bringing unemployment down.
It also says the timing and strength of a recovery very much depend on the performance of the world economy, which will influence demand for Irish exports.
The Central Bank praises the Government's measures taken so far to deal with the public finances, but warns that any 'slippage' would damage confidence. It also urges the Government to give greater detail on how it plans to cut the budget deficit over the next few years.
The report says the measures planned to recapitalise the banks are designed to ensure banks will start lending normally again, but it says close monitoring of the situation will be needed.
On plans to help struggling mortgage holders, the bank says any measures should not damage the banks nor put an extra burden on the public finances.
The bank says public sector reform was a key ingredient in boosting the economy's performance, and an agreed approach to this would be a 'major contribution' to confidence in the economy.
It adds that some areas of the economy - such as health insurance, utilities and public transport - would benefit from greater competition.
The bank believes the economy, as measured by gross national product, will shrink by 1.5% this year, while gross domestic product will fall by 0.5%. These are slightly smaller falls than the bank forecast in its last bulletin in January. It expects GDP growth of 2.8% next year, with GNP rising by 2.4%. GDP includes profits earned by foreign multi-nationals based here.
