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Wednesday 7 December 2016

Ireland hit by 'unexplained investment weakness' for years - IMF

Published 08/04/2015 | 02:30

Christine Lagarde, managing director of the International Monetary Fund (IMF), arrives for a family photograph at the Group of 20 (G-20) summit in Brisbane, Australia, on Saturday, Nov. 15, 2014. Leaders of the world's 20 largest economies including U.S. President Barack Obama and Chinese President Xi Jinping gather in Brisbane this weekend to focus on economic issues. Photographer: Ian Waldie/Bloomberg
Christine Lagarde, managing director of the International Monetary Fund (IMF), arrives for a family photograph at the Group of 20 (G-20) summit in Brisbane, Australia, on Saturday, Nov. 15, 2014. Leaders of the world's 20 largest economies including U.S. President Barack Obama and Chinese President Xi Jinping gather in Brisbane this weekend to focus on economic issues. Photographer: Ian Waldie/Bloomberg

Investment in Ireland was well below potential from 2011 to 2014, and the reason why is not fully clear, according to the International Monetary Fund.

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That's despite the weak performance largely coinciding with the 2010/2013 period of the EU/IMF bailout when the fund had unprecedented oversight of the economy here.

Lack of access to finance and uncertainty about the economic outlook are two likely reasons why businesses invested less after the crisis, even where on paper it looked attractive, the report said.

Ireland is one of a number of highly indebted countries in Europe where investment came in well below the IMF's forecast levels over the period, the global rescue fund said in its latest World Economic Outlook.

Globally, the IMF, under Christine Lagarde, pictured, said growth potential took a big hit after the 2007-2009 financial crisis and is likely to lag for years, implying that interest rates should likely stay low for quite a while.

Potential growth is a measure of how fast economies could grow over time without hitting inflationary speed bumps such as lack of workers or other resources.

That potential was slowing in richer economies before the financial crisis due to ageing populations and a drop in technological innovation, but has worsened since.

In Ireland and some other countries, investment has lagged well behind potential.

"For some euro-area economies, there are cases of unexplained investment weakness during 2011-14, with evidence of financial constraints and policy uncertainty playing a role beyond output in impeding investment. Earlier in the crisis, investment was above the level predicted for these economies," according to the report.

Investment has been weak among the developed economies since 2008, according to the report, but Ireland along with Greece, Italy, Spain and Portugal were especially hard hit.

The study, part of the Fund's twice-yearly World Economic Outlook, could frame the discussions over how to boost growth when the world's economic policymakers gather in Washington DC next week for the IMF and World Bank's spring meetings. Over the next five years, advanced economies' annual growth potential should rise to 1.6pc, still below pre-crisis growth rates, making it more difficult to cut high public and private debt, the IMF said.

With interest rates low, "monetary policy in advanced economies may again be confronted with the problem of the zero lower bound if adverse growth shocks materialise", the IMF said. It also said weak demand in the Eurozone and Japan could prompt even lower potential growth than forecast. The study comes ahead of the Fund's global economic forecasts next week.

In emerging markets, potential annual growth fell to 6.5pc from 2008 to 2014, about 2 percentage points lower than before the crisis, and is expected to fall to 5.2pc over the next five years as populations age, structural constraints curb capital growth, and productivity slows.

A projected drop in growth potential for China, the world's second largest economy, could be even deeper as it transitions away from an investment-led economy to one based on consumption, the IMF said.

The Fund urged rich economies to support demand and investment, including more funding for research and development and infrastructure. Emerging economies should also boost infrastructure spending, get rid of excessive regulation, and improve education.

Meanwhile, a report on the Irish market from DKM Economic says a European Union rule that seeks to cap national debt at 60pc of gross domestic product no longer makes sense.

Under the rule national debt should not be greater than 60pc of GDP and borrowing should not exceed 3pc of GDP.

However, according to DKM those measures reflect historic borrowing costs, not the current low interest rate environment.

At the current long term interest rates, servicing debts of 150pc of GDP costs 3pc of GDP, the same cost as servicing debt of 60pc of GDP if rates were at 5pc, the report said.

Irish Independent

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