THE ORGANISATION for Economic Co-operation and Development says the Irish economy is near a “turning point” but warns in a new forecast that the recovery will be weak.
Saying risks surround the recovery, the Paris-based organisation warns that the full implications of the Government’s bank rescue scheme “for the public finances and finally the taxpayer” remain unclear.
However, it says the Government’s tough approach to restoring the banking sector has the merit of being transparent and may finally restore financial health.
Underlining risks from the Greek debt emergency, the report said there would be severe consequences for Ireland if euro zone members fail to stamp out the sovereign debt crisis in the single currency area.
The serious escalation of the Greek crisis sent Irish bond spreads at the beginning of May to their highest levels since March 2009, it notes. “There is the risk that the euro area countries and institutions do not succeed in addressing the current sovereign debt and bond crisis.
“The materialisation of this downside risk would have dramatic consequences for Ireland in terms of debt sustainability but also in terms of the growth outlook over the forecast horizon.”
The organisation says the Government’s medium-term fiscal strategy rests on an optimistic macroeconomic scenario after 2010, adding that the pace of the fiscal adjustment would be threatened if this did not materialise. This would weigh on market confidence.
“On the positive side, however, the notable improvement in Ireland’s price and cost competitiveness could allow growth to pick up more quickly than expected in the context of the ongoing global economic recovery.”
The forecast suggests gross domestic product (GDP) will decline by 0.7 per cent this year, one-tenth the rate in 2009, before expanding by some 3 per cent in 2011. While the projected contraction for 2010 is more modest than the 0.9 per cent forecast by EU economics commissioner Olli Rehn, the 2011 growth forecast is the same as Mr Rehn’s.
The organisation adds that a decline in the labour force, driven by falling participation and outward migration, is likely to continue for some time.
“After a severe recession in 2009, the economy appears to be close to a turning point,” says the new OECD economic outlook.
“The recovery will nevertheless be externally driven, as unwinding the imbalances created during the economic boom will continue to restrain consumption and investment for some time.
“This suggests that a broadly-based revival will take some time to emerge. By contrast, the contribution of exports to growth will be increased by the improvement of external competitiveness.” The forecast said the 2010 budget was an important contribution to stabilising the public finances. “In particular, the overall emphasis on reducing spending rather than increasing taxes is appropriate. There will be a need for ongoing monitoring and fiscal discipline.”
However, the organisation warns that Ireland’s deficit remains “very high”. It was important for the Government to hit its fiscal targets to ensure confidence and credibility is maintained, it says.
The “correction” in the housing market continues, says the organisation. “The excess inventory of homes for sale, compared to what would be the normal stock at this point, stands at about 136,000 units, the equivalent to about four years of demand.”
