The Government should use the forthcoming Budget to dampen inflationary pressure in the economy, the Organisation for Economic Co-operation and Development (OECD) urged yesterday.
In its latest outlook for the global economy, the OECD has warned that strong consumption in Ireland will keep the rate of inflation here above the euro-zone average during the next two years.
According to forecasts contained in its latest Economic Review and Outlook, growth among the OECD's 30 members will be 2.5 per cent in 2007 - down 0.4 per cent on its May projection - and 2.7 per cent in 2008.
OECD chief economist Jean-Philippe Cotis said: "Rather than a major slowdown, what the world economy may be facing is a rebalancing of growth across OECD regions."
As economic growth in the US and Japan slowed, "a solid upswing may be underway" in the euro zone. But initially this rebalancing "would not be strong enough to prevent a mild and short-lived weakening in 2007 in the OECD area", he said.
In a country report on Ireland which accompanies the forecasts, the OECD predicts Ireland's economy will grow by 5.1 per cent this year and next, up fractionally on the 5 per cent rate projected last May, and by 4.5 per cent in 2008.
The report warns that Ireland's economic growth is being fuelled by strong household spending and could be inflationary. "Inflation is projected to remain above the euro area average . . . The Budget should prioritise spending items that alleviate bottlenecks in the economy such as investment in human and physical capital," it states.
The harmonised index of consumer prices (HICP) for Ireland - an international measure of inflation which facilitates cross-country comparisons - is expected to grow by 2.8 per cent next year and by 3 per cent in 2008.
For the OECD as a whole, HICP inflation - which excludes the impact of interest rate rises on mortgage repayments - is projected to fall from 2.2 per cent in 2007 to 2.1 per cent in 2008.
As well as calling for a slowdown in the rate of current Government spending, the report calls on the Government to do more to reform the domestic energy market.
"Boosting competition in network industries, especially in the electricity and natural gas sectors, is becoming a matter of urgency as these sectors contribute disproportionately to inflation," it states.
Elsewhere, the OECD slashed its US forecast to 2.4 per cent in 2007 from May's 3.1 per cent. It raised the outlook for the euro zone but by just 0.1 points to 2.2 per cent.
Japan, the UK and Canada were among those downgraded, but the outlook for Germany and Italy improved.
The OECD advised the European Central Bank to raise interest rates further.
"The recovery now seems sufficiently robust to justify some additional withdrawal of monetary stimulus," according to the report.
