Government forecast too optimistic, says OECD
Ireland will not see any growth until 2012 - report
Published 26/05/2011 | 05:00
THE Government's reduced forecasts for the economy this year are still too optimistic, the Paris-based Organisation for Economic Co-operation and Development said yesterday, but the economy may be back on track next year.
In its latest global economic outlook, the OECD predicted that Ireland would endure a fourth year without growth in 2011, despite surging economies elsewhere.
The Department of Finance recently cut estimates for growth this year to 0.7pc. The OECD sees zero growth in 2011, as shrinking domestic spending offset increased exports.
The thinktank sees the economy expanding 2.3pc next year, in line with department forecasts, which could keep the Budget targets on track. The economy shrank 1pc last year and 7.3pc in 2009.
"Despite robust export growth, weak domestic demand and ongoing fiscal consolidation have prevented an economic recovery from unfolding so far," the OECD said in its twice-yearly economic outlook.
"As domestic demand stabilises, a modest upturn of output is expected in the course of 2011, with some acceleration in 2012. The unemployment rate is likely to stay high, and core deflation to continue."
A senior analyst at ratings agency Standard & Poors said Ireland's rating could be raised if growth averages 3pc over the next few years, as the national recovery plan forecasts, but S&P sees growth averaging 2.5pc.
S&P credit analyst Trevor Cullinan said in a presentation in Dublin that he expected that Ireland would meet its fiscal targets. The rating could be cut if the banks produced further surprises, but he did not expect this to happen.
In a separate report, economists at Goodbody Stockbrokers said the economy was already gaining from reduced costs and could attract foreign investment in manufacturing which had turned its back on Ireland.
The OECD urged the Government to stick to its plan to cut borrowing to less than 3pc of GDP by 2015 but warned that interest rates on government debt would have to fall if the country was to remain solvent and improve competitiveness through wage restraint and structural reforms.
It described debt levels in Greece, Ireland and Portugal as "unsustainable" if market interest rates remained high for long and warned that policy options for restoring the countries to a healthy fiscal path all carried big risks.
It mapped out three policy options should market confidence not return, but also spelled out risks associated with each path and stopped short of endorsing any of them.
The first option was continued funding from the European Union and International Monetary Fund.
The second would be to reschedule existing debt over a "very extended period" and at low interest rates, while the third option would be reduce government liabilities through a more far-reaching debt restructuring.
For the eurozone as a whole, the OECD forecast a strengthening of the economic recovery this year while underlying inflation pressures would remain low, making further interest rate hikes from the European Central Bank unnecessary.
It said the global economic recovery was on track, helped by a stronger United States, but warned that threats ranging from high oil prices to European sovereign debt crises could yet combine to create a bout of stagflation -- which is usually defined as a period of low growth and high inflation.
With European countries making more of an effort to cut their deficits than the US, the OECD said there was a stronger case for raising interest rates in the US than in the eurozone.
Global growth is forecast to ease to 4.2pc this year from 4.9pc in 2010, before accelerating to 4.6pc in 2012.
"This is a delicate moment for the global economy, and the crisis is not over until our economies are creating enough jobs again," OECD secretary general Angel Gurria said.
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