High debt levels could damage Ireland’s economic prospects, OECD warns

“Persistently” high private debt levels pose a serious risk to Ireland’s economic outlook, the Organisation for Economic Co-operation and Development (OECD) has warned.

In its twice-yearly Economic Outlook report, the influential global body warned that elevated debt levels here left the economy "sensitive to rising interest rates". The European Central Bank is expected to begin winding down its post-crash stimulus programme later this year as a forerunner to raising interest rates in 2019.

Warning

The OECD’s comments echo a recent warning from the Economic and Social Research Institute, which suggested Irish consumers could be hurt more by a cycle of ECB rate rises because of the high dependency on variable rate mortgages here.

In its report, the OECD noted that the Government’s budgetary policy would be mildly contractionary in 2018 and 2019, but said it needed to keep improving its fiscal position to create a buffer against future economic shocks, most notably Brexit, which posed a significant threat to Ireland’s economic outlook.

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The State needs to leave room to use fiscal policy to support for growth as a counterbalance to the potentially “strong negative impact of Brexit at the end of the transition period in 2021”, it said.

The OECD said the Government’s €116 billion national development plan should be “conditional” on improving the Government’s fiscal position.

This would require various national infrastructural projects “to be carefully prioritised”, it said.

Assessment

Overall the OECD's latest assessment of Ireland was relatively upbeat with the Paris-based agency predicting economic activity here would remain robust in the near term, fuelled by "solid employment growth and consumption", before gradually easing.

It noted that wage pressure had risen in tandem with the rapid decline in unemployment but inflation had been kept in check thanks to the appreciation of the euro against the pound sterling in the wake of the Brexit vote in the UK.

It said the effects of sterling’s depreciation would eventually dissipate with wage pressures feeding through to higher inflation.

In terms of the world economy, the OECD said global growth is expected to hit 3.8 per cent this year, nudging up to 3.9 per cent in 2019.

However, the prospect of a trade war is threatening the global growth outlook, which otherwise is on course for a 40-year low in unemployment, the OECD said.

The US and EU could still negotiate a trade deal even if Washington imposes import tariffs on EU steel and aluminium, US commerce secretary Wilbur Ross said on Wednesday. EU leaders agreed earlier in May to open discussions about market access for US products, but only if Washington grants the EU a permanent exemption from tariffs.

Tariffs

The EU now has a temporary exemption, which expires on Friday. “There can be negotiations with or without tariffs in place. There are plenty of tariffs the EU has on us. It’s not that we can’t talk just because there’s tariffs,” Mr Ross told an OECD panel.

On the UK, the OECD noted that economic growth remained “modest” compared with other major economies. And it warned that the UK government must stand ready to ease up on austerity measures if growth weakens significantly in the run-up to the UK’s withdrawal from the EU.

Brexit negotiations should aim to "preserve open trade with the European Union and high access for financial services to EU markets", the OECD said.

– Additional reporting by Reuters