Business lobby group IBEC has cut its growth forecast for this year from 1.6pc to 0.9pc. In its first quarterly economic outlook of 2012, it said consumer spending was set to fall by a further 2pc in 2012, before recovering by 0.5pc in 2013.
The Government's GDP growth forecast for 2012 remains at 1.3pc. However, the European Union and the IMF recently cut their 2012 GDP growth rate for Ireland to 0.5pc from 1.1pc.
IBEC said the challenging economic outlook for 2012 reinforced the need for the upcoming government jobs strategy to include ambitious new stimulus measures to support jobs and growth.
This should include a major investment in physical and human capital and new initiatives to support domestic demand.
"It is vital that Ireland continues to invest and plans for the future. Focus to date has been on correcting the public finances and the banking system and both of these are well on track," IBEC director general Danny McCoy said.
"The overriding priority for 2012 must be getting people back to work. This requires radical new thinking from both the Government and troika."
Mr McCoy said IBEC has already identified to Government a number of innovative measures targeted at supporting domestic demand.
These include allowing people to release a portion of AVC (Additional Voluntary Contributions) and personal pension contributions, and increased investment in physical and human capital.
He said the case remains compelling for investing in strategic infrastructure, through either pension funds, proceeds from the sale of state assets or in partnership with the private sector.
IBEC called for no further taxes or charges on employment, as this would only damage growth, Mr McCoy added.
"IBEC has set out a range of proposals in this regard, including allowing people to access a portion of their AVCs and personal pension schemes, so this money can be spent in the economy now. Such a move could release €1.3bn into the economy," Mr McCoy said.
IBEC predicts that exports will continue to drive Ireland's economic recovery, increasing by 3pc in 2012 and 4pc in 2013.
The weaker euro exchange rate will boost the nominal value of GDP against which the EU/IMF targets are set. Ireland remains on track to meet its deficit reduction targets, IBEC said.
"While currency markets remain turbulent, in 2012 the euro looks set to trade at a weaker level with both the dollar and sterling. This will have a positive impact on our export performance," Mr McCoy added.
On a positive note for the domestic economy, IBEC said that if consumer confidence improves, there is a possibility of positive economic surprises this year: Budget 2012 did not increase income tax and the ECB decision to reduce interest rates will increase the discretionary income of mortgaged households by 6.5pc.