Investment aimed at addressing the State’s infrastructural problems will need to be “carefully sequenced” to avoid adding to inflation, the OECD has warned Ireland.
In its twice-yearly economic outlook, the Paris-based Organisation for Economic Co-operation and Development (OECD) acknowledged that while large investments in housing, transport and energy were needed, the Irish economy faced capacity constraints, especially in terms of labour and skills.
“Effective prioritisation and sequencing of projects are needed to balance potential short-run inflationary impacts and the long-run benefits of enhanced public investment,” it said.
The OECD’s warning echoes recent comments by the Irish Fiscal Advisory Council (Ifac) which claimed the Government was pursuing an “everything now” approach to budgeting which was fuelling domestic price pressures.
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It also comes in the wake of an election campaign where parties from all sides made big spending promises.
In its assessment, the OECD predicted the Irish economy would contract by 0.5 per cent in headline gross domestic product (GDP) terms this year on the back of what it described as “significant swings in investment and exports, mostly driven by the multinational sector”.
However, it noted that “such volatility masked renewed strength in pharmaceutical exports, following their post-Covid rebalancing”.
Following a contraction this year, it predicted the Irish economy would rebound growing by 3.7 per cent and 3.5 per cent in 2025 and 2026 respectively “as volatility from the multinational sector subsides, financial conditions improve and goods exports recover”.
The Government’s overall fiscal stance was projected to be broadly neutral over the projection horizon underpinned by continued revenue strength.
On Budget 2025, it noted that around two-thirds of the core €10.5 billion package consisted of permanent spending measures, “largely aimed at preserving the existing level of public services, against the backdrop of a larger-than-assumed population, and a need to sustain infrastructure spending.”
It warned, however, that repeated breaches of the State’s 5 per cent spending rule “risked lowering” the Government’s fiscal credibility. “Sustained adherence to the 5 per cent spending rule is needed to ensure the long-term sustainability of public finances,” it said.
The 5 per cent expenditure rule was introduced by the government in 2021 to keep the annual increase in spending within sustainable limits.
Overall, the organisation said the world economy faces proliferating risks ranging from trade tensions to wars and debt troubles that could threaten its “remarkable resilience” of past years.
It predicts a “solid pace” of growth in the US, weakening only mildly to 2.4 per cent in 2025 — still notably faster than the rest of the G-7. It reckons Germany will expand just 0.7 per cent, which would be the least of any member of that club.
China’s economy will decelerate to a pace of 4.4 per cent in 2026, held back by high savings and ongoing real-estate weakness, the OECD’s economists predict.
“Risks to growth are tilted to the downside,” they said with regard to the world’s second biggest economy. “Potential further credit events may disrupt the orderly adjustment process in the real estate sector.”
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