The Central Bank said the economy will return to growth in the second half of 2010, but some weakness will continue in the early months of the year.
In a quarterly bulletin issued today, the bank said the economy "appears to be close to the trough of the downturn in output terms", but further job losses were likely.
Recovery will be led by growth in the export sector, it said, with domestic consumer spending set to record a fall for the year.
The bank said economic recovery was likely to be "gradual and modest" when it emerged, with a broadly based recovery taking some time to emerge as the economy tried to shake off the effect of imbalances created in the boom years.
"A solid start has been made, especially in budgetary measures, but recovery will also be contingent on making further progress in overcoming the budgetary and broader economic and financial challenges that Ireland faces," the bulletin said.
"A reversal in wage competitiveness losses will also be key: given the declining price level during 2009 this necessarily entails some nominal wage reductions, as are already being implemented in parts of both public and private sectors.
Gross national product (GNP) is believed to have fallen by about 11 percent in 2009, following a drop of almost 3 per cent in 2008. Gross domestic product fell 7 per cent in 2009. The Central Bank forecast a further contraction in GNP of 2 per cent in 2010.
"However, compared to the corresponding period of 2009, positive growth, on an annual basis, is expected to return from the second half of this year, and on a full-year basis in 2011," the bank said, adding that growth next year would be moderate and possibly in the range of in the range of 2.5 to 3 per cent.
GDP is expected to grow 1 per cent, compared with an October forecast for a 2.3 per cent decline.
The Central Bank warned competitiveness would be key to recovery.
It also said lenders were facing further loan losses this year, depite plans to transfer "toxic" debt to the National Asset Management Agency (Nama), and warned of a challenging environment for banks.
"Economic prospects make it clear that some further loan losses can be expected even after the crystallisation of losses on the transfer to Nama," it said.
The bank's head of economic analysis and research John Flynn said that the employment sector tends to lag behind growth in economic output, and therefore the labour market is likely to remain weak in 2010.
The rate of increase in unemployment levels is expected to slow, but this will be more a reflection of rising emigration and a fall in labour force participation, than an improvement in the underlying employment market. The unemployment rate is forecast to hit 13.5 per cent this year compared to just under 12 per cent in 2009.
Joan Burton, Labour Party finance spokeswoman, said that this would be one of the highest rates of unemployment in the developed world. Up to 100,000 people are expected to emigrate this year in search of employment, she said.
"The need to create jobs has to move to the top of the Government's agenda," she said.
It will probably be early 2011before Ireland starts adding net new jobs, Mr Flynn said.
"Certainly we can go back to employment growth if we follow the right policies," he added.