The Central Bank of Ireland has urged the Government to push ahead with €3.1 billion of cuts and tax hikes in this month's budget, warning any scaling back of the planned fiscal adjustment "runs the risk of starting to unwind the positive effects" of the considerable consolidation effort to date.

In its latest quarterly bulletin, the Central Bank said there was no point in putting at risk the hard-won gains of the past several years for the sake of “a relatively small short-term fiscal easing”.

The bank has lowered its economic growth forecast for 2013, citing a weakness in consumer spending and exports at the beginning of the year.

While the forecast is for a continuation of the “gradual recovery” in economic activity, it will be at a slightly slower pace than previously predicted, the bank said.

GDP growth of 0.5 per cent is now projected for this year, with growth of 2 per cent forecast for 2014, representing a downward revision of 0.2 and 0.1 per cent, respectively, to the previous forecasts for 2013 and 2014.

The bank also revised down its projection for gross national product, which excludes the impact of multinationals on the economy, estimating it to grow by 0.1 per cent this year and 1.2 per cent next year.

Employment growth of 1.1 per cent is projected for 2013 as a whole, rising slightly to 1.2 per cent in 2014. The unemployment rate is forecast to decline to 13 per cent next year.

The bank said a further improvement in export performance is projected in the second half of the year and in 2014 on the basis of a strengthening of demand in Ireland’s main external markets and a gradual easing of the negative impact of patent expiry.

“Export growth in the first quarter was adversely affected by economic weakness in trading partner countries and specific effects in the pharmaceutical sector. More recently, exports have benefitted from signs of improving external demand conditions, which are projected to support continued export growth in the future.”

The bank said domestic demand was projected to stabilise this year and to make a small positive contribution to overall GDP growth in 2014.

While consumer spending has recovered from a poor start to the year, it is likely to decline marginally for the year as a whole.

“A displacement in car purchases from the first to the third quarter following a change in the vehicle registration system, may have served to exaggerate the underlying weakness in consumer demand in the early months of this year.”

The bank said the prospect of a marginal increase in consumption in 2014 reflects the positive impact of improving labour market conditions which should support a modest increase in personal disposable income.

“While prospects remain modest, employment continues to rise, with full-time employment now growing for the first time since early 2008. Although many headwinds remain, this lends support to the outlook for consumer spending.”

The Central Bank said a recovery in underlying investment expenditure this year has not yet been reflected in the headline numbers, which have been distorted by the adverse trend in aircraft investment.

The bank said the main challenges the Irish economy faces are fiscal consolidation, banking soundness and the competitiveness of wages and prices.

“While much has been achieved more progress is required on all three fronts to enhance Ireland’s prospects for a successful exit from the EU/IMF Programme and to create the conditions for a sustainable economic recovery.”