‘Economy won’t grow until 2012’

THE Irish economy, which contracted 14.5% in the last three years, will not return to growth until 2012, the Organisation for Economic Cooperation and Development (OECD) said.

In an update on the Irish economy, the OECD said a number of factors are making it difficult for the economy to get back on a sustainable growth path.

The Government has predicted growth of around 0.7%, for 2011 but the OECD has dismissed that possibility in its analysis.

It suggests that the swingeing cutbacks in the last few budgets and a lack of consumer demand suggests the economy will just mark time in 2011 before gearing up for modest growth next year.

It stressed, however, that the sharp adjustments introduced in recent budgets were vital to ensure the future of the economy and to restore the banking sector.

Despite continuing export growth, which will result in a balance of payments surplus, the OECD said “weak domestic demand and ongoing fiscal consolidation have prevented an economic recovery from unfolding so far”.

The organisation continued: “As domestic demand stabilises, a modest upturn of output is expected in the course of 2011, with some acceleration in 2012.”

It warned that the unemployment rate was likely to stay high, leading to a continuing fall in prices, which is helping the drive by Irish manufacturers to win vital export market share to replace the absence of domestic demand.

In its report, the OECD said the budget situation is challenged by high deficits, reflecting the collapse of the housing market that has led to a sharp dip in tax revenues.

Furthermore, it said “the large cost of bank recapitalisation” had placed a major burden on the country and the Irish taxpayer.

The general government deficit has to be reduced to below 3% of GDP by 2015 if progress is to be made in bringing public debt under control and to “restore fiscal sustainability”.

It claimed that government plans to cover the recapitalisation needs of the banks “should be done as planned without delay”.

The report also warned of the need for the economy to maintain its drive towards greater competitiveness.

The global economic recovery still faces many risks, which could lead to “stagflation”, the OECD warned in its latest analysis of the global outlook.

World growth is forecast to be 4.2% this year, down from 4.9% last year, before going back up to 4.6% in 2012.

It said rising prices for oil and other commodities, the damage from Japan’s earthquake, and a sharp slowdown in China could derail those forecasts.

For Britain, the organisation predicted sub-par growth of just 1.4% this year, rising to 1.8% in 2012.