Difficulties in the wider European economy will make it hard for Ireland to offset the effects of further fiscal consolidation through export growth in the coming years, the Organisation for Economic Co-operation and Development has said.
In its latest economic outlook, the OECD said it expected the State to record low but positive GDP growth in the next two years, even though unemployment is likely to remain high in that period.
It has forecast 0.5 per cent growth this year and 1.3 per cent in 2013, down from May estimates of 0.6 per cent growth in 2012 and 2.1 per cent in 2013. Irish growth is expected to increase to 2.2 per cent in 2014.
The report says Ireland should be allowed miss deficit targets set as part of an EU/IMF bailout if its economy grows at a slower than expected pace.The Government reiterated earlier this month that despite trimming its forecast for the level of growth, it still expects to cut its budget deficit to 3 per cent of GDP in 2015 from 8.3 per cent of GDP this year.
"Reflecting a slowdown of the world economy, especially in Europe, ongoing fiscal consolidation and tight credit conditions, the recovery is expected to proceed at an only moderate pace," the OECD said in its latest economic outlook.
"If growth turns out to be weaker than expected, however, this should be allowed to show up in slower improvements in the headline fiscal balance."
It said that steady progress has been made in addressing fiscal imbalances in Ireland and that this has already paid dividends by allowing the State to regain access to sovereign bond markets.
Ireland had made “marked progress” in overcoming problems in the financial and banking sectors and the Government should continue to implement its medium-term fiscal plan in order to halt the rise of public debt, the OECD said.
However, the OECD said the fact that Ireland’s main export markets are struggling means it will be difficult to “offset the drag from ongoing fiscal consolidation, household deleveraging, low credit availability and subdued sentiment”.
In the report, published this morning, the OECD slashes its global growth forecasts and warns that the debt crisis in the euro zone is the greatest threat to the world economy.
The Paris-based think-tank urges central banks to prepare for more exceptional monetary easing if politicians fail to come up with credible answers to the debt crisis.
It expects the global economy to grow by 2.9 per cent this year before expanding 3.4 per cent in 2013. The estimate marked a sharp downgrade since the OECD last estimated a rate in May of 3.4 per cent for this year and 4.2 per cent in 2013.
The euro zone is facing two years of economic contraction, it says, while the United States risks a recession if politicians there fail to agree a deal to avoid a combination of tax hikes and budget cuts that will otherwise go into effect next year.
Providing the deadlock in Washington is overcome, the US economy will grow 2.0 per cent next year, the OECD estimated, cutting its forecast from 2.6 per cent in May.
"The US fiscal cliff is a very important source of concern, but the greatest downside risk remains the euro zone," OECD chief economist Pier Carlo Padoan said.
"The reason for that is not only recession, but also the fact that different negative policy (feedback) loops between sovereign debt, the banking situation and exit risks remain. So the overall zone remains in a state of fragility."
Cutting its estimates, the OECD forecast that the euro zone economy would contract 0.4 per cent this year and another 0.1 per cent next year, only returning to growth in 2014 with a rate of 1.3 per cent.
The OECD warned that diverging financing conditions within the European monetary union threaten to pull it apart if policymakers fail to get a grip on the debt crisis.
"The euro area, which is witnessing significant fragmentation pressures, could be in danger," Mr Padoan wrote in a foreword to the outlook, urging politicians to overcome deadlock over a single European Central Bank-led bank supervisor.
Given the weakness of the global economic outlook, the OECD warned governments against being too zealous in their belt-tightening efforts and recommended that Germany and China even pursue temporary stimulus spending to revive growth.
Additional reporting: Reuters
