OECD predicts Irish economy will contract by 0.6% this year

The Paris-based think tank, the OECD, has forecast that the economy measured by gross domestic product (GDP) will shrink this year by 0.6%.

The forecast is contained in the Organisation for Economic Co-operation and Development's Economic Outlook published today.

It says "heightened global uncertainties" as well as weaker markets in Ireland's trading partners and the effects of higher interest rates will all contribute to a falloff in growth.

However, it also predicts that inflation will continue to ease and that growth by GDP will pick up again next year by 2.4% and 2.9% in 2025.

It forecasts that growth in the domestic economy, measured by Modified Domestic Demand (MDD), will slow to 2.1% this year, 1.7% in 2024 and 2.1% in 2025.

Growth measured by both GDP and MDD was over 9% in 2022.

It expects inflation measured by the Harmonised Index of Consumer Prices to be 5.3% this year, before slowing to 3.1% next year and 2.6% in 2025.

It expects unemployment to remain below 5% out to 2025.

The OECD says "widespread skill shortages" will keep pressure on wages despite "some easing" in the labour market.

It also expects the new minimum 15% corporation tax on larger companies, which kicks in next year, to only have a "limited" effect on the public finances.

It does, however, comment that what it describes as "significant reliance" on temporary, untargeted income supports "may accentuate inflationary pressures".

The think-tank welcomes the decision by the Government at Budget time to set up two investment funds and says keeping to the 5% spending rule "remains essential".

It also recommends that planning regulations be eased to encourage investment in electricity generation and housing.

Responding to today's report, the Minister for Finance said he was not surprised by the OECD's prediction.

"We prefer to use modified domestic demand as a more meaningful measure of the underlying strength of the domestic economy here in Ireland, we are forecasting growth this year and next year so GDP is of limited usefulness of actually measuring actual economic activity taking place here in Ireland," Michael McGrath said.

Global growth to slow but avoid a hard landing

The OECD also said today that the global economy will slow slightly next year but the risk of a hard landing has subsided despite high levels of debt and uncertainty over interest rates.

Global growth is set to moderate from 2.9% this year to 2.7% in 2024 before picking up in 2025 to 3%, the Paris-based policy forum said in its latest Economic Outlook.

Growth in advanced economies that make up the OECD's 38 members was seen headed for a soft landing with the US holding up better than expected so far.

The OECD forecast US growth would slow from 2.4% this year to 1.5% next year, revising up its estimates from September when it predicted US growth of 2.2% in 2023 and 1.3% in 2024.

Though the risk of a hard landing in the US and elsewhere had eased, the OECD said that the risk of recession was not off the table given weak housing markets, high oil prices and sluggish lending.

China's economy was also expected to slow as it grapples with a deflating real estate bubble and consumers save more in the face of greater uncertainty about the outlook.

Its growth was seen easing from 5.2% this year to 4.7% in 2024 - both marginally higher than expected in September - before slowing further in 2025 to 4.2%, the OECD forecast.

In the euro area, growth was seen picking up from 0.6% this year to 0.9% in 2024 and 1.1% in 2025 as Germany - the region's largest economy - emerged from a recession this year.

Nonetheless, the OECD warned that, because of the high level of bank financing in the euro zone, the full impact of interest rate hikes remained uncertain and could weigh more on growth than expected.

Meanwhile, Japan, the only major advanced economy yet to hike interest rates in the current cycle, was expected to see growth slow from 1.7% this year to 1% in 2024 before picking up to 1.2% in 2024.

While countries' growth outlooks were diverging, they shared similar fiscal pressures with debt burdens projected to keep rising for years to come in G7 countries, the OECD warned.

Additional reporting from Reuters