Weaker exports and lower levels of investment will see the Irish economy go into reverse this year for the first time in over a decade, the Organisation for Economic Co-operation and Development (OECD) has warned.
In its latest global outlook report, the Paris-based agency predicts the economy here will contract by 0.6 per cent in gross domestic product (GDP) terms in 2023 “as heightened global uncertainties, a weaker outlook in main trading partners and high interest rates weigh on exports and investment”.
With price pressures subsiding, growth is projected to pick up to 2.4 per cent in 2024 and 2.9 per cent in 2025.
The forecast comes on the back of a similar assessment by the European Commission, which warned earlier this month that the State’s exports had been adversely hit in the current slowdown.
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The OECD said while strong employment and lower savings supported consumption and activity in the first half of 2023, “increased borrowing costs and still relatively high energy and input prices have weighed heavily on business and housing investment”.
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The slowdown in global demand has simultaneously triggered marked reductions in export volumes, adding to the post-pandemic contraction in exports of pharmaceutical and medical products, it said.
While GDP is expected to decline, modified domestic demand, a more accurate measure of domestic conditions, will continue to grow but at a more modest pace. It is predicted to increase by 2.1 per cent in 2023 before slowing to 1.7 per cent in 2024.
In its report, the OECD noted that while tax receipts here remain strong, ensuring the sort of “long-term fiscal sustainability” needed to meet “the investment-intensive ageing, housing and climate” demand remains a distinct challenge for the State.
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It commended the Government for setting aside windfall corporate tax revenues in two new savings vehicles, but warned “stricter adherence” to the 5 per cent spending rule “will also be essential”.
The spending rule limits annual increases in Government spending to 5 per cent, viewed as a sustainable rate for the economy. It was adopted in 2021 but has been broken every year since.
On the Government’s budgetary package, the OECD said that higher permanent spending on welfare payments, public services and infrastructure would reduce inequality and enhance productivity growth while noting it would also result in a breach of the spending rule in 2024.
“Productivity-enhancing policies should prioritise the reform of planning regulations to support housing supply and investment in renewable generation, and measures to expand childcare capacity and flexible work arrangements to further strengthen woman employment growth,” it said.
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In its overall outlook, the OECD said the global economy was confronted by the twin “challenges of persistent inflation and subdued growth prospects”.
“GDP growth has been stronger than expected so far in 2023, but is now moderating as the impact of tighter financial conditions, weak trade growth and lower business and consumer confidence is increasingly felt,” it said.
Asked about the OECD’s comments on Ireland, Minister for Finance Michael McGrath said GDP as a measure “can be quite volatile”, and the Government acknowledged it could be in negative territory across the year.
“We prefer to use [the indicator of] modified domestic demand (MDM) as a more meaningful measure of the underlying strength of the domestic economy here in Ireland,” Mr McGrath said. He was speaking ahead of launching a new initiative to improve financial literacy across all generations of the population.
“We are forecasting growth this year and next year. GDP is of limited usefulness in actually measuring the economic activity taking place here in Ireland. So what I do take comfort from is the overall outlook, which remains broadly positive. It is in line with the projections we set out on Budget Day, which does provide for continued growth in the Irish economy in terms of modified domestic demand this year.”
The OECD said global GDP growth is projected to ease to 2.7 per cent in 2024, from 2.9 per cent this year, before edging up to 3 per cent in 2025, as real income growth recovers and interest rates start to be lowered.
In the euro area, which had been relatively hard hit by Russia’s war of aggression against Ukraine and the energy price shock, GDP growth is projected at 0.6 per cent in 2023, before rising to 0.9 per cent in 2024 and 1.5 per cent in 2025.
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“The global economy continues to confront the challenges of both low growth and elevated inflation, with a mild slowdown next year, mainly as a result of the necessary monetary policy tightening over the past two years. Inflation has declined from last year’s peaks. We expect that inflation will be back at central bank targets by 2025 in most economies,” OECD secretary-general Mathias Cormann said.
“Over the longer term, our projections show a significant rise in Government debt, in part as a result of a further slowdown in growth. Stronger efforts are needed to rebuild fiscal space, also by boosting growth. To secure stronger growth, we need to boost competition, investment and skills and improve multilateral co-operation to tackle common challenges, like reinvigorating global trade flows and delivering transformative action on climate change,” he said.
It warned that activity has slowed in interest-sensitive sectors, particularly housing markets, “and in economies reliant on bank-based finance”.
It also warned that heightened geopolitical tensions, including recent violence in the Middle East, were adding to uncertainty about the near-term outlook.
“Headline inflation has fallen in almost all economies, easing pressures on household incomes, but core inflation remains relatively high,” it said.
