OECD Economic Outlook – Ireland

Friday, December, 2010

According to the OECD’s Economic Outlook for Ireland (16 Dec 2010), after two years of deep recession, activity seems to have reached a bottom in the first half of 2010.  A mild recovery is projected to be driven by exports, while domestic demand is likely to remain sluggish.  If the 4-year National Recovery Plan is sustained, the OECD believes that it should help bolster activity and support employment growth in the medium run.

The OECD predicts that GDP will shrink slightly in 2010 (-0.3%), which is line with PMCA’s estimates, and that there will be modest growth in 2011 (1.5%) and higher growth the following year (2.5%).

According to the OECD, specifying and implementing the National Recovery Plan will be essential to achieve the government’s “ambitious” objective of reducing the deficit to 3% of GDP by 2014.

The OECD’s growth forecasts are more realistic than most (Irish-based) commentators’ forecasts and PMCA is inclined to agree with the OECD that the the target of reducing the exchequer deficit to 3% of GDP is 2014 is ambitious.  The additional year agreed to achieve the objective may be needed.  This is primarily due to the contractionary effects of the austerity measures, which are only beginning in Ireland.  The IMF has recently written of the contractionary effects of fiscal consolidation (World Economic Outlook, October 2010) and PMCA believes that the deflationary effects of tough fiscal policies, coupled with the international macroeconomic environment, are likely to particularly affect a small open economy like Ireland, especially over the next 1-2 years when there is still a high degree of uncertainty over the country, politically as well as economically.

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