THE Central Bank has warned that more needs to be done to drive down labour costs and reinforce competitiveness, in its latest report.
"One important way to do this would be to press ahead with public sector reforms to deliver the maximum possible level of public services from the reduced resources available for expenditure," the report said.
It added that this would help a sustainable recovery.
"More generally, pay remains high in both the public and private sectors, adding to costs and prices in the economy, and no doubt discouraging expansion and investment projects by exporting firms."
The bank also revised down its expectations for economic growth for both this year and next.
In its latest bulletin, the value of business in Ireland, including the multinationals measured by Gross Domestic Product (GDP), is forecast to grow by half a per cent this year before jumping to 1.7pc next year.
The analysis is a drop of 0.2pc for both years compared to the bank's summer report.
The Central Bank blamed Ireland's vulnerability to an international economic slowdown for the impact on business at home.
It said: "The undershoot in Irish GDP since the beginning of the (bailout) programme is broadly comparable to what has occurred in the rest of the euro area and is largely a result of the weaker external environment."
The review has also forecast unemployment will fall to 14.5pc next year.
And - similar to the worse-than-forecast GDP figures - the value of Irish-owned business measured by Gross National Product (GNP) is expected to contract by 0.4pc this year before jumping to 0.7pc growth next year.
Siptu, one of the country's biggest unions, reacted angrily to the Central Bank's call for a further cut in labour costs.
President Jack O'Connor said: "The problem with our economy is not that wages or spending is too high.
"It is that consumer demand continues to fall through the floorboards precisely as a result of the pursuit of this nonsensical approach which reflects an ongoing attempt to resolve the problems created by those at the top of society through crucifying people on middle and low incomes."