The Irish economy is on track for a “soft landing” as it slows down, the International Monetary Fund (IMF) has said, as it largely backed the Government’s budgetary policy despite criticism from the State’s own spending watchdog.
In its latest assessment of the state of the economy, the IMF said the outlook remains favourable even if there are still considerable risks to the downside including the potential fallout from the Russian invasion of Ukraine or the Israel-Hamas war. The domestic economy, while slowing, is on track to expand at a “still healthy pace at 2.5 per cent in 2023/24” and inflation should keep falling to its 2 per cent target by late 2025, it said in its latest assessment of the country published on Friday.
“The outlook is a soft landing,” the IMF said in a statement. “The external position in 2022 is assessed to be moderately stronger than the level implied by fundamentals and desirable policies,” it said.
The report comes while the State is technically in recession after four straight quarters of gross domestic product (GDP) contraction. Still, GDP is not seen as a useful guide to Irish economic health given that it is skewed by multinational companies moving assets through the Republic. While unemployment has ticked up for two straight months it remains close to historic lows.
The fund also backed the Government’s spending policies, describing its 2023 fiscal stance as “appropriate”.
“While the 2024 Budget entails a slightly expansionary policy, it still targets a sizeable surplus,” it said. “With inflation continuing to recede, one-off cost-of-living measures should be phased out.” The IMF also backed the Government’s decision to invest corporation tax windfalls in two new investment funds
Minister for Finance Michael McGrath welcomed the IMF’s report. “I note . . . the fund’s view as regards [the budget] which struck an appropriate balance between mitigating the impact of the cost-of-living challenges on the society, meeting investment needs and maintaining the provision of public services on one hand, and supporting disinflation and building buffers on the other,” he said in a statement.
The fund’s comments come little more than a week after the Irish Fiscal Advisory Council accused the Government of “gimmickry” and taking an “everything now” approach to spending.
Even so, the fund, which played a key role in bailing out the State in November 2010, emphasised that the State should look to do more to boost housing and accelerate the green transition.
“Policies to increase housing density, replace rent caps with targeted housing support for vulnerable households, and improve productivity in the construction sector are important for increasing housing supply and in turn supporting sustainable growth,” it said.
It also underlined the need for authorities to keep a close watch on the commercial property sector, especially for any links to the so-called nonbank sector, for signs of stress while warning against easing Central Bank mortgage rules. The Dublin office market is already in a downturn, with vacancy rates increasing and rents outside of prime areas falling.
“Intensified supervision of credit and liquidity risks for domestic retail banks should remain and continued close surveillance of large international banks’ vulnerabilities to funding stress is warranted,” it said. “Mortgage measures should not be used to address broader housing affordability issues,” it added.
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