OECD undercuts ESRI’s growth forecast for Irish economy this year

Group says Irish economy will grow by 4% this year, below ESRI’s prediction of 4.7%

The OECD found that countries such as Ireland could be “more severely affected” by a hard Brexit.

The OECD found that countries such as Ireland could be “more severely affected” by a hard Brexit.

 

The OECD on Tuesday forecast that the Irish economy will grow by 4 per cent this year, and by 2.9 per cent next. This is lower than the forecasts of 4.7 per cent for 2018, and 3.9 per cent for 2019, published on Monday by the ESRI.

The survey from the Organisation for Economic Co-operation and Development (OECD) also found that countries such as Ireland could be “more severely affected” by a hard Brexit.

Elsewhere, continuing, “robust” economic growth is predicted for the EU this year and next, the OECD said, as GDP growth is projected to average slightly above 2 per cent per annum in the region in 2018-19.

“Rising employment should boost incomes and support private consumption, as wages are expected to rise faster than in the past,” the survey said. “High business confidence, increasing corporate profitability and encouraging global demand should keep supporting investment.”

The economic survey, European Union 2018”,published in Brussels said: “After years of crisis, the European economy has robustly expanded in 2017 , helped by very accommodative monetary policy, mildly expansionary fiscal policy and a recovering global economy.”

But the report warns that the union must use the opportunity to focus on longterm challenges, specifically social and economic inequality - “wellbeing disparities”- the effect of Brexit, low potential growth, an ageing population and continuous technological developments. It says that the overall effect of a hard Brexit is not considered a major macro-economic risk for the EU and is manageable if preparations for all scenarios are made. But countries like Ireland would be more severely affected.

Banking

The report warns that moving from a wholesale banking sector, that is centred in London, to a potentially more fragmented banking landscape might increase the cost of capital for households and non-financial corporations, as the economies of scale and scope of the London industry may diminish. “In this respect, the EU should see the UK departure from the EU as an opportunity to advance faster on the Capital Markets Union.”

The EU needs to foster “stronger and more inclusive growth” - the EU can lift the EU’s low growth potential, the report says, by creating the right incentives and conditions to support national reforms. “Across Europe there is ample scope for reforms to boost competition, encourage innovation and business dynamism and make growth more inclusive. It is in good times that countries can best afford the adjustment costs of such reform.”

Single market

The report warns that the single market remains “fragmented”, with barriers in key areas including services, transport, finance, energy and digital markets.

Now is the time to build on national reforms to ensure that women, youth, older workers and migrants are integrated in the labour market.

“Making it much easier to hire skilled workers from outside the EU, by simplifying the eligibility requirements and procedures for the EU Blue Card, would also help,” the OECD says. “Swiftly integrating refugees would improve both their wellbeing and expand the labour force and help address EU citizens’ concerns.”

Average regional disparities in GDP per capita have declined over the last decade. “But progress on regional convergence came to a halt with the crisis and has not resumed since.”

The report is critical of the effectiveness of EU Cohesion funding, arguing that to further support income convergence, cohesion spending should “focus on items with long-term growth benefits and clear spillovers across borders, including human capital, innovation and transport, energy and digital networks. There is too much focus on spending the funds and not enough on the quality of investment. Higher co-funding rates could encourage greater spending effectiveness.”

And the OECD criticises the EU’s climate control efforts, arguing that the EU emission trading system (ETS) has not played as great a role as it could in driving low-carbon investments. “The recession, extensive promotion of renewable and other measures have generated a large surplus of allowances and a low carbon price. The ETS will need to be tightened further andtaxation increased on the use of fossil fuel outside electricity generation.”

The report suggests that “Bringing all emissions, notably transport, into the ETS could make room to progressively replace most other climate policies.

Unemployment is running at 7.1 per cent across the EU but the labour market situation is not homogenous. While some countries, like Greece and Spain still face high unemployment rates the labour market is tightening in a number of central European countries like Germany and Poland.

Yet some of these are precisely those most resistant to accepting new migrants - business surveys “indicate that labour market shortages are a key factor limiting production and firms’ growth in Poland and other Visegrad countries that are benefiting from the revival in the global economy thanks to their close ties to global value chains.”

Imbalances within Europe “have declined asymmetrically since the financial crisis”, with adjustments mainly taking place in countries with larger net external liabilities. “Additional adjustments are needed to bring the net international investment position to more sustainable levels in some countries. At the same time, elevated external surpluses have persisted in Germany, the Netherlands and Sweden. These external surpluses have led the European Union average current account surplus to reach a peak of 2.6 per cent of EU GDP in 2017, with significant projected current account surpluses also in 2018 and 2019,” the report said.