Ireland’s economy is set to grow by 4.6pc this year and 5pc in 2022 on the back of buoyant multinational exports and spillovers from the US stimulus plan.

The Irish growth rate is slightly above the EU and eurozone averages, according to the European Commission’s spring economic forecast.

While the forecast was upbeat, EU economy chief Paolo Gentiloni warned governments not to ‘prematurely’ withdraw state support from vulnerable people and businesses.

“For a year, we have been presenting forecasts that were very negative,” said Mr Gentiloni.

“Today, for the first time since the pandemic hit, we see optimism prevailing over uncertainty. That uncertainty is of course still there. But recovery is no longer a mirage: it is underway. We must avoid mistakes that could undermine it: namely, a premature withdrawal of policy support.”

The Commission’s spring forecast was more upbeat due to a rebound in global activity and trade and a “growth impulse" from the EU's €675bn pandemic recovery fund.

The EU economy is expected to grow by 4.2pc in 2021 and 4.4pc in 2022, while the euro area is forecast to expand by 4.3pc and 4.4pc, respectively.

Economic activity in the EU is now projected to recover to its pre-crisis level in the fourth quarter of 2021, earlier than previously forecast.

The Irish forecast is in line with the government’s most recent predictions, which assumed 4.5pc growth this year and 5pc in 2022.

Ireland was the only EU economy to grow in 2020, expanding by 3.4pc, the Commission confirmed on Wednesday.

The Irish economy is forecast to rebound in the second half of 2021, although the construction outlook will remain “relatively weak” the Commission said.

Ireland’s modified domestic demand, which better reflects the performance of the domestic economy, is expected to expand by 4.3pc in 2021 and 7pc in 2022.

However, there is a risk of “scarring effects” due to long-term unemployment in Ireland, with the jobless rate expected to rise to 10.7pc this year before declining to 8.1pc in 2022 - still well above the pre-pandemic rate of 5pc.

Inflation in Ireland is projected to reach 0.9pc in 2021 and increase to 1.3pc in 2022, still well below the European Central Bank’s 2pc target.

The budget deficit is forecast to fall to almost 3pc of GDP in 2022 - the EU’s upper limit - while general government debt is projected to rise to 61.4pc of GDP in 2021 before falling to 59.7pc of GDP in 2022, below the EU’s 60pc limit.

"The budget deficit is expected to decrease from 2022 onwards, but risks to the macro-fiscal outlook remain high,” the Commission said in its forecast.

“Risks to the fiscal outlook reflect potential changes to the international taxation environment.”

Meanwhile, the EU is urging countries to apply for and spend money from the bloc's €675bn recovery fund.

Ireland has yet to submit its application.

The EU estimates a 1.2pc boost in EU gross domestic product (GDP) in 2020-22 from the recovery funding.