Business World

Friday 23 February 2018

Crisis in eurozone threatens Ireland's economic progress

OECD forecasts slowdown in growth, while turbulence in Greece ends our chances of a return to the markets this year

'We want to be Iceland' reads the banner of students and teachers in Valencia, Spain, who were protesting yesterday against cuts in education spending that labour unions say will put 100,000 substitute teachers out of work.
'We want to be Iceland' reads the banner of students and teachers in Valencia, Spain, who were protesting yesterday against cuts in education spending that labour unions say will put 100,000 substitute teachers out of work.
Thomas Molloy

Thomas Molloy

THE Organisation for Economic Co-operation and Development (OECD) warned yesterday that Ireland's economic recovery risked being derailed by the fallout from the eurozone debt crisis.

The economy will expand at an even slower pace this year than last, the Paris-based think tank said in a gloomy report on the prospects for this country and the eurozone.

Growth as measured by gross domestic product (GDP) is forecast to expand 0.6pc this year -- slightly less than the 0.7pc posted last year, it added.

The organisation said in November that the economy would expand 1.5pc this year, which means the new forecast is little more than one-third of the old one. Government and private consumption are predicted to fall, along with investment by companies.

Unemployment is expected to hold steady at 14.5pc while inflation is forecast to spike to 2pc this year as energy prices and VAT hikes bite. Irish nine-year bond yields were up six basis points at 7.5pc yesterday, having risen back above 7pc over the past couple of weeks as fears of contagion from Greece grew.

"Progress in narrowing macroeconomic and financial imbalances is being made and needs to continue," the report said. "Adjustment would be aided by a rapid resolution of growing mortgage arrears. Given the risk that high unemployment might become structural, reforms to public employment services and job training should be fully implemented to help job seekers return to work," the think tank added.

The OECD was not the only Paris-based organisation to pour cold water on the Government's targets for 2012. BNP Paribas said yesterday that the present bailout should be extended by at least two years to the end of 2015. Such an extension "is likely and preferable", BNP said on the same day Minister of State for European Affairs Lucinda Creighton said nobody could predict whether Ireland would need access to the European Stability Mechanism.

An extended bailout could be done by rescheduling loans or agreeing some sort of deal on promissory notes, BNP said. Extra cash to provide a cushion in 2014-2015 shouldn't be ruled out, it added. Such an extension would be a "prudent approach" to protecting the State from market stresses generated elsewhere and would not be a "sign of Irish failure", it added. BNP said the economy probably contracted again in the first quarter after contracting in the previous two quarters, but calculates that the economy began growing again in the current quarter.

Closer to home, Goodbody Stockbrokers warned short-term fiscal targets were exceeded -- Ireland still faces a huge fiscal challenge, but their forecasts suggest the budget deficit would come in below the troika target of 8.6pc of GDP in 2012.

"Recent turbulence in Greece has put a dent to hopes of Ireland returning to markets in even a small way," economist Dermot O'Leary said. He added that he still had "concerns" about the State's chance of hitting medium-term deficit targets, although he maintained his growth forecast for 2012 at 0.7pc -- the same level as the OECD's forecast.

UBS economist Stephane Deo said in another report published yesterday that it was unlikely Greece would leave the euro because that would be much more expensive for the remaining countries than a bailout. Still, he warned that a Greek departure would lead to bank runs in Ireland, Portugal and Spain.

"It would become obvious to depositors in other parts of Europe that their deposits are at risk and we may thus see a bank run as a possible scenario. The two IMF countries, Portugal and Ireland, appear to be the most at risk," the economist said.

Irish Independent

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