OECD says no domestic economic recovery until 2010

The Irish economy will not return to growth until 2010, the Organisation for Economic Co-Operation and Development (OECD) forecasts in its latest Economic Outlook, published today.

The Paris-based think-tank is forecasting a fall of 1.8 per cent in real Gross Domestic Product (GDP) this year as the "severe housing market correction" weakens the wider economy.

It is projecting a decline of 22.7 per cent in the volume of gross fixed investment and in Ireland building and construction are the largest investment component.

The OECD anticipates consumer spending volumes will decline 0.5 per cent during 2008, before easing ahead 0.4 per cent next year.

The volume of total domestic demand will fall this year to -5.5 per cent and contract again in 2009 by 4.7 per cent, according to the OECD.

Total domestic comprises consumer spending, Government current spending and fixed investment.

Real Government spending on day-to-day goods and services is predicted to rise by 3.9 per cent this year, and 2.3 per cent in 2009, the OECD predicts.

Having revised down its GDP projections for this year the OECD no longer expects a rebound next year and is now forecasting a 1.7 per cent decline in GDP for 2009 "as the housing construction cycle bottoms out and the financial turmoil wanes".

It is forecasting a modest growth pick-up of 2.6 per cent in 2010 but says this will be insufficient to stop the average annual unemployment rate - the numbers out of work as a proportion of the labour force - rising from 7.7 per cent in 2009 to 7.8 per cent in 2010.

These projections are far higher than the OECD's forecasts from last June when it said unemployment would average at 6.5 per cent next year.

It anticipates the underlying inflation rate - which excludes mortgage interest - will fall sharply next year to 0.9 per cent down from an average of 3.1 per cent this year.

The OECD argues Government fiscal policy should be allowed to support demand in the near term "but once the recovery is underway substantial measures will be needed to restore medium-term sustainability".

It said competitiveness in the Irish economy needs to be improved, particularly in "network industries and sheltered service sectors".

Rossa White, chief economist with Davy Stockbrokers said the OECD forecasts for the Government deficit of 7.1 per cent looks too optimistic.

"The government deficit is likely to end up closer to 8.5 per cent of GDP than the 7.1 per cent that the OECD has forecast," he said.

Mr White also disagreed with the OECD's observation that the national pay agreement may help competitiveness: "The pay deal will do the opposite. Our relative wages are already too high and this will exacerbate the situation".

The OECD projections were made after October 14th and include the impact of changes in the Budget.