OECD warns Ireland over ‘premature’ shift from austerity

Ireland has “prematurely” shifted from austerity to stimulus and remains “very vulnerable” to external shocks, according to the OECD.

In its latest economic outlook, the Paris-based think tank also recommends that better-than-expected government revenue be put towards reducing the State’s high public debt.

Overall, the OECD paints a positive picture of Ireland’s recovery, noting the economy is now on a “robust rebound” and projected to grow strongly over the next two years.

It forecast the economy would grow by 4.3 per cent in GDP terms this year and by 3.3 per cent next year.

The organisation said strong growth in the State’s main trading partners together with rising house prices, tourism receipts and consumer confidence were “helping to underpin a virtuous circle of higher employment, incomes and spending”.

However, it also cautioned that the strong cyclical recovery needed to be complemented with continuing structural reforms to increase competition, raise innovation, make it easier to start and grow a business, and improve the relevance of vocational training to the labour market.

It noted that while employment growth was robust, with the jobless rate falling to 11 per cent this year, the share of long-term unemployed remained large and approximately 40 per cent of the unemployed were “poorly educated and skilled”.

“The authorities will need to remain focussed on improving training and activation for these people,” it said.

In terms of downside risk for Ireland, it singled out the potential for slower-than-expected growth across the euro zone as the chief risk.

“High private and public debt made Ireland still very vulnerable to unexpected shocks,” it said.

On the upside, it said the investment-to-GDP ratio remained below historical levels and “a self-reinforcing cycle of rising house prices and sharply expanding activity may see stronger growth in construction and other investment than currently projected.”

In its outlook for the global economy, the OECD predicted it will gradually improve over the next two years but Japan will grow less than previously expected while the euro zone struggles with stagnation and an increased deflation risk.

There will be marked divergences among countries both in terms of growth and monetary policy, leading to volatility in debt and foreign exchange markets, the Organisation for Economic Co-operation and Development said.

The United States and Britain will grow more strongly then the euro zone and Japan and, among emerging countries, India, Indonesia and South Africa are set to recover steadily.

Russia’s economy is set to stagnate next year and China’s will soften, the think-tank said in its bi-annual economic outlook. Overall, the global economy is set to grow by 3.3 per cent this year, 3.7 per cent in 2015 and 3.9 per cent in 2016, the OECD said, confirming forecasts published before the G20’s summit earlier this month.

While most estimates remained unchanged, Japan’s forecast was more than halved for 2014 and cut to 0.8 per cent for next year after it unexpectedly fell into recession in the third quarter. But the OECD still expects Japan to recover as corporate profits remain high and a weak yen will help exports. A bigger worry for the Paris-based think-tank is the euro area, which it said “may have fallen into a persistent stagnation trap”.

“The euro area is at risk of deflation if growth stagnates or if inflation expectations fall further,” it said. Its inflation forecasts of 0.6 per cent for the euro area next year and 1.0 per cent for 2016 are slightly more pessimistic than the EU’s own forecasts and far from the European Central Bank’s target of just below 2 percent.

The OECD therefore reiterated its call for the ECB to embark on quantitative easing in the euro zone. “Further monetary stimulus could involve more purchases of asset-backed securities and covered bonds, and also purchases of government bonds, possibly via a weighted basket of euro area countries, and investment-grade corporate bonds,” it said.

The OECD said that below-target budget plans put forward by France and Italy, which are expecting the EU’s verdict on their policies by the end of the week, are “appropriate” to help boost growth. In the United States growth is projected to gain more momentum and remain above trend, the OECD said, reaching 3.1 per cent next year. Britain’s economic growth looks set to slow slightly to 2.7 per cent next year, the OECD said - above the long-run average but just below the 2.9 per cent forecast by the Bank of England earlier this month. Continued weak productivity remained a major risk. The BoE should start to raise interest rates in the middle of 2015 to stop inflation picking up too much, the

OECD added, a few months earlier than implied by the BoE’s recent economic outlook. Growth in China is projected to soften a bit, the

OECD said. “Stimulus measures taken this year continue to support output growth, but property market activity remains weak,” it added. The think-tank has calculated that a gradual 10 per cent depreciation of the euro and the yen against the dollar over the next two years could potentially raise growth in the euro area and Japan by around 0.2 percentage point next year and twice as much the following year. While geopolitical tensions over Ukraine and the Middle East have grown, this has had little impact on commodities markets so far but the risk remains, the OECD said.

Additional reporting by Reuters