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The latest OECD Economic Outlook was published today. Its country summary for Ireland states that the economy is undergoing massive adjustment. Past imbalances are gradually unwinding in banking, the housing market, the government budget and the labour market, leaving a large impact on public debt and unemployment. After two years of deep recession, activity seems to have reached a bottom in the first half of 2010. A mild recovery is projected to be driven by exports, while domestic demand is likely to remain sluggish. The government intends to continue policies to bring the fiscal accounts closer to balance and to restore competitiveness. If sustained, this should help bolster activity and support employment growth in the medium run.

The banking restructuring strategy aims at transferring non-performing loans to government backed entities, and then injecting public funds in undercapitalised banks. While this approach has the merit of preserving banking stability, it comes at a high cost for the public finances and is creating stress in the Irish sovereign debt market. Specifying and then implementing the recently outlined 4-year consolidation plan will be essential to achieve the government’s ambitious objective of reducing the deficit to 3% of GDP by 2014.

Key data and projections from the outlook for Ireland:

2008 2009 2010 2011 2012
GDP – % change from previous year -3.6 -7.6 -0.3 1.5 2.5
Unemployment             % of labour force 6.0 11.7 13.6 13.6 12.6
Fiscal balance              % GDP -7.3 -14.2 -32.3 -9.5 -7.4
Inflation (CPI) 3.1 -1.7 -1.6 0.9 1.2
Private final consumption expenditure –  volume -1.8 -7.2 -1.2 -0.6 0.8
Government final consumption expenditure –  volume 2.8 -4.2 -3.8 -2.7 -0.3
Gross fixed capital formation –  total –  volume -14.4 -30.9 -17.9 2.8 1.8
Final domestic expenditure –  volume -4.7 -12.3 -4.8 -0.5 0.7
Total domestic expenditure –  volume -5.5 -13.8 -4.0 -0.3 0.7
Exports of goods and services –  volume –  National Accounts basis -0.8 -4.2 9.8 6.7 5.8
Imports of goods and services –  volume –  National Accounts basis -2.9 -9.8 7.5 6.2 5.0
Gross domestic product –  deflator –  market prices -1.4 -4.0 -1.7 0.7 1.2
Short-term interest rate – per cent per annum 4.6 1.2 0.8 1.1 1.8
Current account balance –  as a percentage of GDP -5.6 -3.0 -0.3 0.7 3.2