OECD shifts into positive mode on Irish economy

The economy is set to continue expanding rapidly with the unemployment rate falling to almost 3 per cent, according to the latest research from the Organisation for Economic Co-operation and Development (OECD).

In its latest Economic Outlook, which will be welcomed by the Government, the OECD appears now to have a benign view of the economy. It argues that tax cuts will encourage greater female participation in the jobs market and also boost immigration. This will allow the economy to grow by 10 per cent in terms of Gross Domestic Product this year, or 8.7 per cent measured by Gross National Product.

Accelerating wage demands - greater than the terms allowed for under the Partnership for Prosperity and Fairness - will then slow growth in 2001 to 8 per cent for GDP and 7 per cent for GNP. Export growth will also slow, while imports will continue to rise and there may be an acceleration in inflation.

"The risk here is that inflation picks up and competitiveness erodes more quickly than foreseen and that would accentuate the slowdown in 2001," the organisation warns. The OECD argues, however, that this "should not be a cause for concern". The exception is if relatively higher inflation here led to sharp strengthening of the effective exchange rate - in effect making Ireland less competitive on international markets. In turn, this would require a rapid adjustment of wage growth.

The Paris-based organisation is the first international economic organisation to come around to the mainstream Irish view of the boom. It argues, however, that the Government must still concentrate on the "effective implementation" of the national wage agreement and on maintaining Budget surpluses at current levels. But it also says current fiscal - or Budgetary - policy is broadly neutral, particularly given the amount being set aside for future pension provision.

There is also no outright criticism of the last Budget. The OECD believes the tax cuts in the last Budget aimed to alleviate wage pressures, particularly in the public sector where pay increases have been particularly high. Even on house prices the OECD merely says that while there is some risk a sharp downward movement could destabilise the economy, tight bank supervision means such a risk "remains manageable".

Across the rest of the world the OECD is also optimistic. Economic growth in the world economy will expand this year at the fastest pace in more than a decade, making further US and European interest-rate increases necessary.

The combined economies of the 29 member countries will grow 4 per cent this year, far higher than its December forecast of 2.9 per cent. One reason is that the OECD has again upwardly revised its growth estimate for the US, despite releasing its most recent report only three weeks ago. The US will expand by 4.9 percent this year, up from a prediction of 4.5 per cent on May 11th. Growth should slow to 3 per cent next year.

As a result it forecasts further interest rate rises in the US as well as the UK and the euro zone.

Prompt central bank action should keep "inflation low nearly everywhere". It warns, however, that if central banks are not quick to respond to prospects of rising inflation, they risk having to push rates much higher than needed. That could cause a slump in stock markets and also threaten to destabilise the dollar.

According to the OECD, the Federal Reserve could raise its interest rate to more than 7 per cent by next August. Most recently it raised it by half a percentage point to 6.5 per cent.

For the euro zone, the OECD said economic growth of 3.5 per cent this year, slowing to 3.3 per cent in 2001. In its December economic outlook it forecast a 2.8 per cent growth rate for this year and next.

"Growth and employment prospects in the near term are better than at any time since the late 1980s," the OECD said, adding that the "critical issue" is how sustainable this expansion will be.