IMF sees deflation as key threat to Irish recovery

The International Monetary Fund (IMF) has identified deflation as one of the biggest threats to Ireland’s economic recovery.

In its twice-yearly World Economic Outlook, the Washington-based fund predicted Irish inflation would be a meagre 0.6 per cent this year, below the euro area average of 0.9 per cent and well inside the ECB’s inflation target of 2 per cent.

As a result, Ireland and the euro area were singled out as having a relatively high risk of deflation compared with the rest of the world.

A prolonged period of falling prices would have serious repercussions for indebted businesses and households here as it increases the relative costs of servicing debt.

Throughout its report the IMF said the European Central Bank (ECB) needed to take more decisive action to guard against deflation, including unconventional measures such as quantitative easing, if recovery was to be sustained.

On the upside the IMF predicted the Irish economy would outstrip the euro zone in terms of economic growth, expanding 1.7 per cent this year and 2.5 per cent in 2015, compared with rates of 1.2 per cent and 1.5 per cent in the euro zone as a whole.

It also forecast Irish unemployment would fall to 11.2 per cent this year and 10.5 per cent next year, compared to the euro zone averages of 11.9 per cent and 11.6 per cent.

The IMF predicted global recovery would strengthen this year as output in richer nations picked up, but warned of rising risks in emerging economies.

Global output should expand 3.6 per cent this year, slightly lower than forecast in January, and grow 3.9 per cent next year.

However, the IMF said the numbers masked an increasing divergence among countries. While less fiscal austerity should help unshackle growth in the US and Europe, emerging markets were likely to grow more slowly than thought just a few months ago due to tighter financial conditions.

Geopolitical risks have developed because of the conflict between Russia and western countries over Ukraine.