The Central Bank has raised its economic forecast for the year, predicting a rise of 0.8 per cent in gross domestic product (GDP) as the global recovery boost Irish exports.
However, the budget deficit this year is expected to approach 19 per cent of GDP after including the cost of bailing out two lenders and could rise even further, it said.
The latest report reverses April's forecast of a 0.5 per cent decline in GDP. Gross national product (GNP), which excludes profits made by multinational companies based in Ireland, is expected fall by 1 per cent, compared to previous predictions of a 1.5 per cent decline this year.
The Central Bank warned employment growth is unlikely to fully stabilise before the end of the year.
"Downward pressure on unemployment from this source will likely only gradually emerge through next year," the bank said.
Predictions for next year remained bright, with growth in the range of 2.2 per cent and 2.8 per cent predicted for 2011.
The bank said growth would also be influenced by the stabilisation of the bank sector, the management of public finances and improving the competitiveness of the economy.
"With the promissory note to Anglo Irish Bank now being classified within the General Government Sector, the deficit for 2010 would increase to a projected 17 per cent of GDP," the central bank said in its bulletin.
It said this year's bailouts, which injected billions into Anglo Irish Bank and Irish Nationwide, were a "once-off". It said the deficit should fall back towards 10 per cent in 2011 if the government delivers its planned savings measures in the next budget.
Although the public finance data was as expected in the first six months of the year, it was "critically important" that the Government's fiscal adjustment programme was adhered to. It said the Croke Park agreement would contribute to the credibility of this programme.
The bank noted the economy's competitiveness position was improving, and further gains were expected next year.
Ireland still remains heavily dependent on multinationals and global markets, the report said.
"Although there are ongoing concerns about the strength of the recovery in some countries, the initial recovery in global growth has tended to exceed earlier expectations, partly reflecting the exceptional support from monetary and fiscal policies," it said.
"It has also become clear, however, that some of these same policies are generating potentially damaging side-effects, in particular, the emergence of high and unsustainable fiscal deficits."
This was at risk of slowing or even derailing the international recovery, the bank said.
Additional reporting: Reuters
