The Irish economy is unlikely to expand in 2011 as tax increases and other austerity measures cause private domestic demand to shrink further, the Organisation for Economic Cooperation and Development said today.
The OECD made the prediction as part of its global economic outlook, forecasting 2.3 per cent growth for Ireland in 2012.
"Ireland is continuing to undertake a comprehensive and vital adjustment programme to reduce its macroeconomic imbalances and restore its banking system to health," the OECD said. "Despite robust export growth, weak domestic demand and ongoing fiscal consolidation have prevented an economic recovery from unfolding so far."
The OECD said a "modest upturn" of output was expected this year as domestic demand stabilises, before gathering pace in 2012.
However, unemployment is predicted to stay high, with core deflation remaining.
The Government last month cut its economic growth forecast for this year to 0.75 per cent from 1.75 per cent. The Central Bank has forecast growth of 0.9 per cent for the year.
As part of the bailout agreed with the European Union and International Monetary Fund, the deficit must be reduced to under 3 per cent by 2015.
"The fiscal position remains characterised by high deficits, reflecting negative cyclical effects, the collapse of housing-related tax revenues and the large cost of bank recapitalisation," the OECD said, adding that the recapitalisation should be "done as planned without delay".
The report also called for improvement in competitiveness to remain a priority.
Globally, the OECD said recovery was "firmly under way", although the pace differed between countries and regions.
The report warned historically high unemployment as a result of the crisis should prompt countries to improve labour market policies to boost job creation.
The outlook predicted world gross domestic product (GDP) would grow by 4.2 per cent this year and by 4.6 per cent in 2012. Among the OECD countries, forecasts remained in line with previous predictions, with GDP expected to rise 2.3 per cent in 2011 and 2.8 per cent in 2012.
Euro area growth is predicted to reach 2 per cent this year and next. The US is projected to see activity rise by 2.6 per cent in 2011 and by 3.1 per cent next year.
"The recovery is becoming self-sustained, with trade and investment gradually replacing fiscal and monetary stimulus as the principal drivers of economic growth," the OECD said. "Confidence is increasing, which could add further buoyancy to private sector activity."
However, possible rises in the price of oil and commodities could pose a risk to recovery, fuelling inflation, while a stronger-than-projected slowdown in China and the continued "unsettled" fiscal situation in the US and Japan could also threaten the fragile growth.
"This is a delicate moment for the global economy, and the crisis is not over until our economies are creating enough jobs again," said OECD secretary-general Angel Gurría. "There is also some concern that if downside risks reinforce each other, their cumulative impact could weaken the recovery significantly, possibly triggering stagflation in some advanced economies."
Additional reporting: Bloomberg
