Further fiscal measures will be needed to aid Irish economic recovery, including cuts in public expenditure and further increases in revenue, as public indebtedness increases sharply, a new report said today.
The OECD's Economic Outlook said measures would be needed over an extended period, as economic recovery was repdicted to be weak. However, there are signs that the pace of contraction is slowing, the report said.
According to the OECD, the economy should benefit from the upwing in world trade and restored competitiveness due to declines in wages and prices.
"The ongoing domestic adjustment will nevertheless be prolonged, and the economic recovery weak," the report said.
"With Nama (the National Asset Management Agency), the government seeks to restore the banking system to health by recognising and dealing swiftly with losses, thus contributing to the recovery. This should be implemented along with the necessary risk–sharing mechanisms to protect the taxpayer."
Looking at the wider economic picture, the report said the current economic recovery being seen in OECD countries will not be enough to halt the rise in unemployment.
The report said recovery spreading across the region is "tepid" and too timid, and it may be 2011 before the jobless rate begins to fall in the euro area. Unemployment in the US is expected to peak in the first half of 2010.
The report attributes the subdued pace of recovery to households and businesses repairing finances and reducing debts. It predicted inflation will continue to fall in 2010.
"The good news is that the recovery – albeit a weak one – is underway," said OECD secretary-general Angel Gurría.
"With millions of jobs lost and public budgets under strain, governments will have to tread carefully in the months ahead. Removing stimulus measures is imperative but such action has to be carried out gradually to avoid undermining the recovery."
At the forefront of the recovery is China, which has been helped by limited direct exposure to the financial crisis and a substantial stimulus package. The US, meanwhile, is expected to grow its Gross Domestic Product (GDP) by 2.5 per cent in 2010, and a further 2.8 per cent in 2011, as government stimulus measures, a rebound in world trade, stockbuilding by businesses and a stabilising housing market aid recovery.
Although the euro area will benefit from similar growth drivers, job creation may be weakened by work-sharing schemes and other measures to maintain jobs during the crisis. The report said household confidence is likely to remain weak as a result, hindering any recovery.
It predicted that the euro area economy would grow 0.9 per cent next year and 1.7 per cent in 2011.
Weak domestic demand would limit economic activity in Japan, the report said, but the region, which is expected to grow by 1.8 per cent and 2.0 per cent in 2010 and 2011 respectively, would likely benefit from strong growth in the rest of Asia.
"Unprecedented policy efforts appear to have succeeded in limiting the severity of the downturn and fostering a recovery to a degree that was largely unexpected even six months ago," said Jørgen Elmeskov, acting chief economist of the OECD. "It is now time to plan the exit strategy from the crisis policies, even if its implementation will be progressive."