THE IRISH economy will grow this year by less than anticipated just four months ago, according to new projections by the International Monetary Fund (IMF).
The Washington DC-based organisation also said that European authorities “urgently needed” to adjust interest rates for bailed-out euro zone countries.
In new forecasts for the world economy, published yesterday, the IMF expects Irish gross domestic product (GDP) to expand by 0.5 per cent this year.
The last IMF forecasts on Ireland, published immediately after the bailout in December, had anticipated growth of almost twice that rate – 0.9 per cent – in 2011.
The forecast is the most downbeat of any of the international organisations involved in Ireland’s bailout or of any leading Irish forecaster. The Department of Finance is the most upbeat; it predicts GDP will grow by 3½ times the rate forecast by the IMF in 2011.
The IMF has not changed its economic growth forecast for Ireland in 2012, however. It still believes the Irish economy will grow by almost 2 per cent next year.
The weaker economy will negatively affect the jobs market, according to the forecast. The report predicts the rate of unemployment will be 14.5 per cent this year and 13.3 per cent in 2012. In December, the IMF had expected jobless rates of 13.5 in 2011 and 12.8 per cent the following year.
The organisation also downgraded its 2011 economic growth projections for Ireland’s two largest exports markets – Britain and the US.
By contrast, and despite the euro zone’s sovereign debt crisis, the IMF is slightly more upbeat about the single currency bloc’s growth prospects both this year and next.
More widely, the fund believes that the global recovery has solidified. However, it also highlighted risks, which it says have heightened since its last assessment in January.
A “tangible downside risk” to recovery comes from “tension in the euro area periphery, which may spread to the core European economies”.
The fund makes a number of policy recommendations for the euro zone, including a call for resolution on the issue of bailout interest rates, which it says in the report need to be “adjusted”.
Commenting at the launch of the report in Washington DC, its lead author Olivier Blanchard said that anything that could be done to reduce the interest rate would be “useful”. He also said that the countries providing the loans had obtained “very good deals”.
Echoing precisely the term used by the president of the European Central Bank, Jean Claude Trichet, the IMF yesterday called for a “quantum leap” in the integration of fiscal policies within the euro zone and joint responsibility for financial stability.
It also says that “more should be done” to reform “entitlement spending”, a reference to welfare programmes.
Apart from the euro zone’s travails, another risk to the world economy, according to the IMF, is a further and sustained increase in already-high oil prices.
The main driver of such an increase would come from supply disruptions owing to political instability in the Middle East, the world’s main oil-exporting region, according to the report.
However, the IMF does not believe that higher oil prices could have the kind of negative effects that were felt in the 1970s when commodity prices soared. “Although [price] increases conjure up the spectre of 1970s-style stagflation, they appear unlikely to derail the recovery.”
The effects of the financial crisis and subsequent recession continue to be felt in labour markets across the world. According to the report, there are 205 million people out of work worldwide, an increase of 30 million since 2007.
Separately, Central Bank governor Patrick Honohan has said that a new European Central Bank liquidity facility to help Ireland’s struggling banks is not likely “for the moment”.
In an interview with Market News International, he also said it was too soon to say when the State could return to the markets instead of relying on EU-IMF funding.
