OECD cuts its forecast for growth in Republic

The Organisation for Economic Co-operation and Development (OECD) has reduced dramatically its growth forecasts for the Republic's economy, warning that the Government must move quickly to bring the public finances under control.

In a generally gloomy commentary on the economy, the OECD has cut its projections for growth next year, expressed as gross domestic product, from 6.5 per cent to 3.6 per cent.

For 2004, the Paris-based think tank foresees a limited recovery to GDP growth of 4.5 per cent, supported by private consumption and investment.

Growth in gross national product (GNP) is set to move from 2.8 per cent this year to 3.3 per cent in 2004, according to the analysis.

It warns that rapid growth in public employment consumption must be brought under control in order to maintain infrastructural development without increasing the budget deficit.

According to the report, the Republic's general government deficit will rise to 1.8 per cent of GDP by 2004, bringing it close to the 3 per cent limit set out in the Stability and Growth Pact.

OECD chief economist Mr Jean-Philippe Cotis said yesterday that the pact was badly in need of reform, but rejected the recent assertion of European Commission president, Mr Romano Prodi, that it was "stupid".

"It did not work well. It needs to be adapted and improved," said Mr Cotis, a former French civil servant who worked this summer on how to improve surveillance of the pact before taking up his present job in August.

Mr Cotis wants to see the goal of capping the deficit and balancing the budget in the medium term kept.

He also wants the pact to be tuned to take much more account of cyclically adjusted deficits, a step which has already been proposed by the European Commission and accepted in principle by EU finance ministers.

The OECD has also slashed forecasts for the euro zone, suggesting that the manufacturing sector could be on the edge of recession.

It is now predicting GDP growth of 0.8 per cent for this year, and 1.8 per cent for 2003, in line with forecasts released last week by the European Commission. The OECD expects the euro-zone economy to grow by 2.7 per cent in 2004.

The latest predictions are based on an assumption that the European Central Bank will cut interest rates by half a percentage point over the next few months.

The OECD is expecting that Irish inflation will edge down over the next two years, but warns that competitiveness could diminish if wage growth is not tempered now.

Any awards awarded under benchmarking must be granted only on the condition that public- sector work practices improve, the OECD says.

As talks progress on drawing up a successor to the Programme for Prosperity and Fairness, the OECD takes a firm stance on avoiding pay-related tax concessions. "There is no room for another national wage agreement based on tax," it states.

Inflation, based on wage restraint, is forecast as 4.3 per cent in 2003, declining to 3.8 per cent in 2004.

The Minister for Finance, Mr McCreevy, welcomed the publication of the OECD's forecasts and echoed its warnings on competitiveness. He said the report showed that "we need to continue to tailor our expectations to the tighter and more challenging situation".

Mr Dermot O'Brien, chief economist with NCB, said the OECD's growth forecasts for the Irish economy were "probably too low".

Mr Austin Hughes, chief economist with IIB Bank, was also more optimistic than the Paris economists, particularly on international contributions to the Irish economy.

The OECD expects export growth to decline to 6 per cent next year from 7.1 per cent in 2002, and for it to remain sluggish in 2004. The forecasts are based on a "hesitant recovery" in the global economy.

(Additional reporting Reuters)