Economy will grow just 0.4% this year, IMF forecasts

THE ECONOMY will grow by just 0.4 per cent this year, but public debt will peak at lower levels than previously anticipated, according to detailed analysis by the International Monetary Fund (IMF).

The report released yesterday was drafted as part of the IMF’s quarterly assessment of the Government’s compliance with the terms of the EU-IMF bailout. Such quarterly reporting is standard practice for states in receipt of IMF loans.

The IMF “Staff Report” confirmed the assessment made in July that the Government had met all of its obligations up to mid-2011. The IMF was strong in its praise for the manner in which the Irish authorities have continued to implement the programme, but stressed the risks for future implementation. A slowdown in global growth and contagion from the euro area debt crisis were highlighted.

The only sign of disagreement between the IMF and the Irish authorities related to the scale of privatisation.

In the quarterly Staff Report the fund “urged” the Government to raise €5 billion from the sale of State assets, more than double the €2 billion committed to in the programme for government. However, this figure was not included in the revised Memorandum of Understanding, also released yesterday, which sets out what the Government must implement.

While welcoming the changes to Ireland’s bailout funding terms, agreed on July 21st, the IMF urged the EU authorities to go further with its reforms of the bloc’s bailout fund, the European Financial Stabilisation Fund.

It said yesterday that “options for additional flexibility with the aim of helping countries such as Ireland regain market access at an early stage should be actively considered”.

The report also contained a thinly veiled criticism of the role of the European Central Bank in one aspect of stabilising the Irish banking system, saying that “greater confidence in the availability of ECB financing in the medium term could maximise the benefits of efforts for the banks’ ability to regain market access in time”.

On the restructuring of the banking system, the report was positive and said the programme was “advancing ahead of schedule in some cases”.

Mirroring Tuesday’s analysis of Ireland’s public debt dynamics by the Economic and Social Research Institute, the IMF’s views on the State’s debt outlook has improved since the organisation’s last report in May.

In the August IMF Staff Report gross public debt was forecast to peak at 118 per cent of gross domestic product (GDP), compared to an anticipated 120 per cent four months ago. The change is the result of GDP being revised up in late June.

On preliminary estimates, when the changes to Ireland’s EU bailout terms agreed in July are included, the figure fell to 117 per cent (when the bailout was agreed in December 2010, the IMF expected debt to peak at 125 per cent of GDP).

The Staff Report, compiled by a group of IMF economists, included forecasts for the Irish economy which were largely unchanged on the last report in May. But the deterioration of the outlook for the global economy in August resulted in a supplementary report in late August. In it the IMF said it would be downgrading Irish GDP growth forecasts, from 0.6 per cent to 0.4 per cent this year. In 2012, GDP is now expected to grow by 1.5 per cent, down from 1.9 per cent. The peak debt-GDP ratio is likely to be revised back up to 119 per cent.

The IMF did not advocate additional budgetary changes beyond those already agreed.

A number of Irish economists have urged an adjustment in the 2012 budget of more than the minimum €3.6 billion that must be implemented under the terms of the bailout.

Noting the continued decline in residential property prices, the report interprets these developments to “suggest that bottom has not been reached” in house prices.

Reviewing household indebtedness, the IMF did not give a view on debt forgiveness, but noted the “high priority” attributed to the reform of bankruptcy procedures. It described existing procedures as “costly and inefficient”. However, it warned that a better bankruptcy framework “could be overwhelmed by a potentially large number of insolvency cases”.