THE INTERNATIONAL Monetary Fund (IMF) has issued a slightly improved forecast for the Irish economy, predicting less shrinkage this year than previously expected. The fund has also called for a “very credible fiscal adjustment” in Ireland.
In its biannual World Economic Outlook, the IMF forecast a 0.3 per cent contraction in gross domestic product (GDP) for 2010. This compares to its previous prediction, made in July, of a 0.6 per cent decline.
The change came as the IMF said the global recovery is on track but the risks of a renewed downturn are “elevated”.
“The world economic recovery is proceeding,” Olivier Blanchard, the IMF’s economic counsellor, told a press conference. “But it is a geographically unbalanced recovery.”
The fund left its forecast for Irish economic growth in 2011 unchanged, at 2.3 per cent, and continues to expect a decline in joblessness, from a peak of 13.5 per cent this year to 13 per cent next.
Jörg Decressin, the assistant director of the IMF research department, said a “strong and very credible fiscal adjustment” was “absolutely essential” in Ireland.
“What is needed is a very strong medium-term plan, but markets are also demanding a downpayment. That is why we actually support the tough measures that the [Irish] Government is taking.”
Ireland would be helped by stronger net exports, he said, “because the global recovery is gathering steam ... and that will help pull the Irish economy along.”
Mr Blanchard said some countries had the leeway to reconsider austerity measures if growth was lower than expected.
But “in countries such as Ireland or some of the southern European countries, Greece for example, there is really no choice than to do fairly dramatic things in as clear a manner as possible.”
Internationally, the IMF remains concerned about the fragile financial system, stating that in advanced economies “the repair and reform of the financial sector need to accelerate to allow a resumption of healthy credit growth”. It describes the progress to date as “very slow”.
It also advocates the tightening of fiscal policy from 2011, but says that this could be postponed in countries with “fiscal room” if the international recovery falters.
In the event of a further slowdown, the IMF suggests that the deployment of unconventional monetary policy tools may be necessary.
This now appears imminent as central banks in the US, Japan and Britain are actively considering or moving towards an immediate resumption of unconventional monetary policy in the form of quantitative easing (QE).
This, however, carries with it its own risks. QE expands the supply of money in jurisdictions where it is implemented. Among other things, this drives down the value of a currency vis a vis other currencies.
On the eve of the report’s launch, the head of the IMF, Dominique Strauss-Kahn, warned against the use of currencies as a “policy weapon”.
As the European Central Bank has given no indication that it intends to engage in QE, there is risk that other major currencies will weaken against the euro.
This would make exports from the euro area, including those from the Republic, more expensive in important markets.
The IMF report notes the difference in the pace of recovery across the world.The fund expects GDP growth of 2.7 per cent this year in the developed world, while the emerging economies collectively will expand by 7.1 per cent.
Euro-zone GDP is expected to slow marginally, from 1.5 per cent in 2010 to 1.3 per cent in 2011.
The finance minister, Brian Lenihan, will arrive in Washington late tonight and will hold bilateral meetings with his European and North American counterparts before travelling to New York on Sunday to reassure investors.
The governor of the central bank, Patrick Honohan, will also attend the IMF/World Bank meetings, and is scheduled to deliver the keynote address to the Institute of International Finance on October 10th.
On October 12th, Mr Honohan will deliver a lecture entitled “Ireland: Recovering from the Financial Crisis” to the Irish-American Business Chamber and Network in Philadelphia.
