The OECD is among the first of the international institutions to state that the world economy is effectively in recession. It points out that the US is in - or is extremely close to - recession while Japan is experiencing the worst slump for 20 years and Germany has been stagnating since March.
And, in common with every other economic commentator, it stresses that, more than ever, its predictions are based on uncertainty following the terrorist attacks on September 11th.
In this environment Ireland cannot help but suffer. However, the OECD's hope is that as global trade picks up towards the end of next year and into 2003 the Irish economy will once again outperform.
The OECD looks at the Irish economy from a different perspective than the European Commission and other international commentators generally, taking a broader view when assessing economic prospects and paying particular attention to the additional pressures faced by such a small, open economy.
In its predictions for this year and next year, when it sees Irish growth at 5.6 per cent and 3.7 per cent, the OECD is probably around the average of Irish economic commentators. But moving ahead to 2003, it is more optimistic than many. It argues that the global recovery should lead to a significant rebound in exports since the main forces attracting foreign manufacturing activity in recent years will not have changed significantly.
This will be greeted with some enthusiasm by the authorities here. However, the OECD warns that, apart from the global uncertainty surrounding this Economic Outlook, the Government has a key role to play. Some of the main risks to the forecast are that wages will continue to grow too rapidly. The outcome of next year's benchmarking process on public sector pay will be crucial here.
It also warns that continuing investment in the State's infrastructure is crucial.
And it is in this area that the Minister for Finance, Mr McCreevy, last week made the biggest cutbacks as he published the spending Estimates for next year. Exchequer capital spending is now expected to be €800 million below where he predicted only last March in 2002. The Minister has hinted that further spending will be made available in the Budget and analysts are agreed that large scale increases will be necessary if the economy is to maximise its chances in the global pick-up in 2003.
There is also concern about property prices, the main worry being that a showdown could lead to reduced consumption. However, it stressed that the banks appear to be well prepared for this and so the risk of financial distress remains limited.
Apart from the global slowdown and the virtual collapse in world trade, the OECD also points to a number of domestic factors which have contributed to recent Irish economic woes. The key risk is that wages will continue to grow rapidly and it warns that if the euro were also to appreciate, competitiveness might deteriorate significantly. This would reduce the impact of the global pick-up going into 2003.
It is quite optimistic about Government finances, although it warns that spending must be closely monitored and tax revenues limited to what has already been promised. According to the OECD the combination of a decline in tourism and reduced cross-Border trade, especially for petrol, and lower car sales are the main factors behind the collapse in tax revenues. At the same time, income tax receipts have weakened as a result of reduced bonus and overtime payments.
In consequence the Budget surplus is projected to decline by some 1.5 per cent of GAP this year and by around 1 per cent next, stabilising at around 2 per cent of GAP in 2002 and 2003. This is on the EU measurement and includes payments into the pension fund.
The optimistic outlook for 2003 is based on a story for global recovery, which itself is reliant on several variables. First, according to the OECD, it is crucial that the insecurity prevailing since September dissipates. Assuming that there are no adverse economic effects from future political and military developments, uncertainty could fade during the first half of 2002.
By mid-2002, the cuts in interest rates, tax cuts in the US and possible a fall in oil prices will also help, according to the OECD. But it admits the downside risks are substantial. These include a further sharp fall in consumer and business confidence in OECD countries, lower imports from non-OECD economies, higher oil prices and unpredictable exchange-rate fluctuations. A key factor is the US, which the OECD believes is now in recession.
Several forces have been at work, including the high-tech correction, the associated collapse in equity values, the adjustment of an inventory overhang and the lagged effects of earlier interest rate increases.
Overall it predicts that the recovery could be fully visible by the second half of 2002. If that turns out to be the case the downturn could turn out to be shorter lived than many feared.
