Ireland is probably the fastest growing economy in the euro zone this year, according to a new report from Davy Research.

In its latest quarterly outlook, Davy has revised upwards its forecast for economic growth here in 2014 to 3.5% from a previous prediction of 2.5%.

The stockbrokers said that exports have bounced back and the sector will continue to recover as the negative impact of the pharmaceutical patent cliff wanes.

The domestic economy is also performing more strongly than expected. Davy noted that both employment growth and a modest rise in nominal wages are helping consumer consumption. 

It predicts that employment will grow by 2.8% this year and by 2.3% next year, while unemployment is pencilled in to fall to 9.6% in 2015 and to 8.6% in 2016.

Davy said it was "encouraged" by the continued strong flow of foreign direct investment announced by IDA Ireland as well as the fact that construction activity is starting to bounce back from an exceptionally low base.

It noted that only 8,000 house were built last year. It said its forecasts are based on housing completions rising back to almost 15,000 in 2016. While this is a substantial increase on recent years, it is still below the 25,000 a year necessary to satisfy "natural demographic demand".

Looking ahead, Davy said its first economic forecasts for 2015 and 2016 are for 3% and 2.8% GDP growth respectively.

Davy also estimates that the Government will need an adjustment of €500m in October's Budget to meet the budget deficit target in 2015. That is far lower than the €2 billion estimate factored into last year's Department of Finance projections.

Davy's chief economist Conall MacCoille said growth in the Irish economy, and especially improvements in the labour market, had been more pronounced than in any other euro zone country.