Ireland could overheat and push up inflation if it spends too much too fast, the OECD has warned.
The Organization for Economic Co-operation and Development (OECD) has released its economic outlook for the coming years.
Ireland’s GDP is forecast to grow by 3.7 percent next year, and 3.5 percent in 2026 “as volatility from the multinational sector subsides.”
That would be good news for the economy as a whole and help goods exports to recover, the OECD adds.
“Growth of modified domestic demand, which controls for the major distortions arising from the activity of multinationals, is projected to be around 3 percent as easing inflationary pressures and a resilient labour market bolster households’ real incomes and consumption.”
But there is a warning for the new government not to go too fast.
“Despite continued revenue buoyancy, with the economy at or close to full employment, there is a need for fiscal prudence, productivity-enhancing reforms and spending efficiency gains.”
In particular, the OECD advises “careful sequencing of investment projects” to avoid fuelling inflation.
Central to this will be “sustained adherence to the 5 percent spending rule” for the long term.
There are already concerns that the pre-election budget would break that spending rule.
Labour is another concern for Ireland which is close to full-employment.
“Continuing to support training and apprenticeships in sectors where labour shortages are high should be prioritised.”
The OECD warns that the state faces shortages in some sectors such as healthcare.
Overall, the OECD is more upbeat about the Irish economy than previously because stripping out multinationals, it says the underlying economy is strengthening.
“Significant swings in investment and exports, mostly driven by the multinational sector, led to volatility in
GDP in the first three quarters of 2024. Such volatility, however, masked renewed strength in pharmaceutical exports.”