OECD warns of property bubble risk

The Organisation for Economic Co-operation and Development has warned of big threats to Ireland’s “robust” growth, among them the risk of another property bubble.

Amid anxiety in the EU/IMF troika about Government moves to loosen the fiscal stance, the OECD said in a new forecast that Budget 2016 was “reasonable” once Dublin maintained progress to eliminate deficits in the public finances .

The latest assessment from the OECD came as Minister for Finance Michael Noonan said he was confident the EU Commission will approve the Budget in the coming weeks.

With troika inspectors in Dublin this week to examine the Government’s books, Mr Noonan said the Commission has assured him “informally” that his fiscal plan for 2016 was within EU rules.

Even as the OECD said in a new global assessment that the “sharp slowdown” in emerging markets and trade was clouding world economy outlook, the think tank upgraded growth projections for Ireland.

“The economy will grow robustly but risks are significant,” the OECD said. “Strong property price rises may boost construction activity further in the short run but also risk sparking another spiral of higher property prices and credit.” The OECD also said the Government’s new capital plan should focus on expanding the density of the metropolitan area as that would increase the viability of public transport and lower emissions of greenhouse gases.

Expansion

GDP in Ireland is now forecast by the OECD to expand by 5.6 per this year, up from 5 per cent in a September report, and by 4.1 per cent next year, up marginally from 4 per cent two months ago.

The OECD said the stimulus package in the Budget should target employment as joblessness still accounted for a large share of the working-age population. “The planned tax cuts and increase in benefits should also aim at reducing high marginal effective tax rates at low income levels, as this will encourage work and raise the incomes of the poor.

“Additional spending should also be devoted to upgrading the skills of the unemployed and strengthening their attachment to the labour market.”

It said growth will provide momentum to job creation, thereby spreading the fruits of the recovery more widely.

Although the OECD said Ireland’s growth would be broad-based, it said the national debt left the State vulnerable to a re-emergence of the banking and sovereign debt crises. It also said fiscal windfall gains from strong growth and low interest costs should be used primarily for more rapid reduction of public debt

Investment

“Exports will increase in line with demand in trading partners. Investment will grow robustly, given improved profitability prospects and low financing costs,” said the OECD.

“Debt repayment, however, is likely to keep the momentum of household consumption in check. Inflation will gradually rise on the back of the increasingly tight labour market. Pent-up demand after a long crisis may result in stronger private spending than projected.”