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Irish economy set to outperform euro zone counterparts OECD urges European Central Bank to cut its key interest rate from 0.25% to zero
The OECD has said that a further interest rate cut for the Euro area is justified, because of weak and falling inflation.
The call for a rates cut – made in the OECD’s latest economic outlook – comes two days before the ECB’s regular interest rates meeting.
In the case of the US, the OECD said that economic growth is sufficiently strong to withdraw the Federal Reserve’s asset purchase programme this year, and prepare to raise official interest rates next year.
Overall the Paris-based organisation sees economic recovery gaining strength in the developed world, with the US leading the way with growth of 2.5% of GDP this year and 3.5% next year.
The Euro Area is projected to return to positive growth this year, growing by 1.2% this year and 1.7% next year.
Ireland is forecast to perform better than the Euro area average, with GDP growth of around 2% this year and next, the latest OECD figures show.
It forecast that unemployment in Ireland will average 11.4% this year, falling to 10.4% next year on the back of steady employment growth.
The OECD predicts that the Government deficit will be 4.7% of GDP this year and 3.1% next year – just outside the EU target of below 3%. It has urged the Government to implement in full its previously announced structural consolidation plans – implying that a budget adjustment of €2 billion should be implemented in the next Budget.
Overall, the OECD said that Ireland’s fiscal consolidation programme remains on track – unemployment is falling, the economy is strengthening and domestic banking is improving.
However, it noted that the Government has a very high level of debt, and the level of non-performing loans in the banking sector – at 24.6% – is the second worst in the OECD. Greece has an NPL ratio of 31%, while in the UK it is 3.7%.
It has also forecast very low inflation levels – just 0.3% this year and 0.7% next year, and warned that slipping into deflation would make it harder to reduce debt, and could put pressure on real wages if the whole of the Euro area fell into deflation.
On the upside, it said that years of under investment means there is potential in the economy for a prolonged period of strong investment and higher GDP growth than projected. It described the economic risks as “broadly balanced”.
OECD sees risks of fallout from Ukraine crisis
The OECD also said that setbacks for emerging markets and rising risks of fallout from the Ukraine crisis are holding back the global economic recovery. The global economy is now set to grow by 3.4% this year, it forecast, trimming its outlook by 0.2 points.
The Paris-based organisation held its forecast that the world economy would grow by 3.9% next year.
“The near-term outlook is for global activity and world trade to strengthen gradually through the rest of this year and 2015,” it said in its semi-annual Economic Outlook report.
“However, still-high unemployment in many countries and the subdued pace of growth in many emerging market economies relative to past norms are likely to limit the momentum of the recovery,” the OECD said.
Although the euro zone has perked up, the OECD trimmed its forecasts for US growth after a bitter winter. Higher taxes in Japan and tighter credit conditions in China were also slowing growth.
The head of economic research at the OECD, Christian Kastrop, commented that the “real problem area for the outlook is high unemployment” in various parts of the world, although the job situation in the US was much better.
The euro zone was “lagging” behind in terms of recovery and the OECD recommended that the European Central Bank should reduce its key interest rate from 0.25% to zero and a possible “switch to a nominal negative rate” for overnight deposits with it.
Addressing widespread concern that inflation has fallen too low in the euro zone, he said that “we do not see an emerging deflationary spiral” and did not think the ECB needed to enact unconventional stimulus measures now.”
But Kastrop said that credit was expanding “hugely” in emerging markets and had to be watched “very carefully”.