Ireland's economy has surged 7.7% in a year, according to official figures that appear to show the former Tiger economy has rediscovered its vigour.

A 1.5% increase in gross domestic product (GDP) in the second quarter pushed the annual growth rate to the highest in the EU after a strong rise in business investment and exports. The government immediately upgraded its growth forecasts for the year – for the second time in a week.

The finance minister, Michael Noonan, said: "When you're in the catchup phase of an economy after a recession you'll get very high growth figures in the early stages, but as it settles I would hope we will have growth of around 3% for the next five years."

Dublin said the news showed that the sacrifices of the Irish people, and policies designed to increase exports, had borne fruit. Ministers are already debating how to spend higher-than-forecast tax revenues, less than a year after the country finished its three-year EU-International Monetary Fund bailout programme.

With the budget deficit predicted to fall to 4% of GDP or below this year – well ahead of target – the government has said it will ease up significantly on further austerity measures in next month's budget. Ireland still has huge debts following the bailout of its banking sector, and thousands of families remain in negative equity despite a resurgence in house prices that has seen values in Dublin jump 23% in the past year.

GDP grew 2.8% in the first three months of this year. The rise in the second quarter was driven by a 13% increase in exports and 1.8% rise in household spending, the largest annual rise in almost four years.

However, fears that a return to the old property boom and crash cycle will return were fuelled by a sharp rise in construction output and rampant house price rises in the capital.

After the 23% rise in the past year, house prices in Dublin are now at their highest level in more than seven years.

Noonan said the recovery was strong and stable. "The government remains committed to building upon and sustaining this recovery and we will do nothing that will put it at risk," he said.

"The turnaround is a direct consequence of the policies pursued by this government and the sacrifices made by the Irish people."

Conall Mac Coille, chief economist at Davy Stockbrokers, said: "The GDP data is finally reflecting the evidence from the surveys and the PMIs that the economy is recovering really rapidly. Every part of the economy – the export sector, construction, consumer spending – it's all picking up together and that's giving you these really strong growth rates."

Mac Coille said GDP growth of at least 4% was likely for the year as a whole and that if GDP was flat for the second half of the year, 5% growth would not be out of the question. KBC Bank Ireland's chief economist, Austin Hughes, also said 4% growth was now on the cards.

To counteract slow growth across the rest of the 18-member eurozone, policymakers have opted to ease credit further with cheap loans from the European Central Bank (ECB). But figures yesterday showed there was only limited demand from banks, which have reported they are already awash with cash to lend.

The ECB, led by Mario Draghi, had made €400bn (£315bn) available for TLTROs (targeted long-term refinancing operations) under which banks could take out loans at an interest rate of 0.15% for four years provided they increased lending to businesses or households, and for two years whether or not they increased lending.

The ECB said banks had taken up only €82bn of the €400bn – about half the figure that had been expected in the markets.

Another tranche of money will be available in December, and some analysts predicted demand might be stronger in three months. The TLTROs are similar to the Bank of England's funding for lending scheme, which got off to a slow start when it was launched in August 2012.

Some economists believe the lack of take-up will force the ECB into more drastic action, including buying government bonds under a quantitative easing programme.

Jennifer McKeown, senior European economist at Capital Economics, said: "But the fact that banks have borrowed relatively little suggests that they have little intention of increasing their lending, either because of their own risk aversion, a lack of demand for loans, or most likely both."

The German finance minister, Wolfgang Schäuble, expressed scepticism this week about whether any action by the ECB would prove to be the cure for the eurozone economy after growth came to a halt in the second quarter of 2014.

"It's no good to hold the central bank responsible for growth and jobs – it's doing what it can but it has basically exhausted its tools, as you can see from current developments," he told the German Bundestag on Tuesday. "Cheap money can't force growth either – otherwise we'd have no problems now," he said.