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Country Briefs: More Balanced Growth is Key to Ireland’s Continued Economic Success

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
August 2006
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Thanks largely to sound policies—including prudent fiscal policy, low taxes on labor and business income, and labor market flexibility—Ireland’s economy is performing well, the IMF said in its recent economic review. Growth is strong, unemployment is low and labor participation is rising, and government debt has been reduced dramatically over the past two decades. Inflation is close to the euro area average, and participation in European and Economic Monetary Union has lowered interest rates in Ireland.

Executive Directors commended Ireland’s continued impressive economic performance but observed that growth has become increasingly unbalanced in recent years, with heavy reliance on building investment, sharp increases in house prices, and rapid credit growth. At the same time, competitiveness has eroded, reflecting the combination of faster wage growth in Ireland than in its trading partners, declining productivity growth, and the appreciation of the euro against the U.S. dollar. Ireland’s small, highly open economy is also vulnerable to external shocks.

Ireland
20032004200520061
(percent change)
Real GNP5.53.95.46.2
Harmonized index of consumer prices4.02.32.22.8
(percent of labor force)
Unemployment rate4.74.54.34.3
(percent of GDP)
General government debt31.129.627.425.9
Current account0.0-0.6-2.6-3.0

IMF staff projections.

Data: Ireland, Central Statistics Office and Department of Finance; Datastream; and IMF, International Financial Statistics.

IMF staff projections.

Data: Ireland, Central Statistics Office and Department of Finance; Datastream; and IMF, International Financial Statistics.

Directors expected economic growth in 2006-07 to remain strong, driven by domestic demand and accompanied by a widening current account deficit and continued rapid credit growth. While a contraction of the construction sector to a more sustainable size over the medium term is likely to be smooth, Directors noted that an abrupt correction cannot be ruled out.

Directors welcomed the Financial System Stability Assessment Update, showing generally strong financial sector soundness indicators and major lenders with adequate buffers to cover a range of shocks. Directors called for a further strengthening of the regulatory and supervisory framework, especially for insurance.

Most Directors considered that modest fiscal tightening would be desirable in 2007, given the strength of domestic demand, potential risks of a hard landing, and the need to prepare for population aging. A number of Directors, however, emphasized the need for further spending increases to achieve social goals. Directors agreed that improvements in public services remain a key priority and welcomed the authorities’ plans to deepen the public debate on fiscal priorities.

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