The economy is experiencing a severe recession as large domestic imbalances correct, but there are recent signs that the pace of contraction is slowing. Ireland should benefit from the world trade upswing along with restored competitiveness as a result of the decline in wages and prices. The ongoing domestic adjustment will nevertheless be prolonged, and the economic recovery weak.

Ireland was the fastest growing OECD economy since the mid-1990s. It is now experiencing one of its most severe recessions. What explains this turnaround? How will the Irish economy recover?

Ireland was the fastest growing OECD economy since the mid-1990s. It is now experiencing one of its most severe recessions. What explains this turnaround? How will the Irish economy recover?

The economy is experiencing a severe contraction as large domestic imbalances correct, compounded by the global downturn and financial crisis. With the recession already well entrenched and further contraction expected, the peak-to-trough fall in GDP is set to reach 14%.

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Activity is contracting as the severe housing market correction has weakened the wider economy, and the weakness will persist well into 2009. Growth will recover in 2010 as the housing construction cycle bottoms out and the financial turmoil wanes.

Ireland has been the OECD’s fastest growing economy for several years, driven by strong consumer demand, fixed investment and a buoyant global demand in areas like IT, pharmaceuticals and financial services.

Now at Harvard, Professor Sen has taught around the world, and is perhaps most noted for his work on development, human development, poverty, gender and welfare, for which he won his Nobel prize. His wife, economic historian Emma Rothschild, has written for the OECD Observer (The politics of globalisation circa 1773, No 228, September 2001).
For more information, visit http://nobelprize.org/nobel_prizes /economics/laureates/1998/ sen-autobio.html

Both the size and the relative incidence or frequency of the foreign-born population have increased in all OECD countries since 1995. So while there have been large increases in traditional migration countries such as the US and New Zealand, there have also been sharp rises in Denmark, Korea, Ireland, Italy, Norway and Spain, where inward migration has recently taken off.

Activity was strong in the first half of 2007, but the slump in house building will slow growth substantially. GNP is expected to increase by 3% in real terms in 2008, which is considerably below the growth rate of potential output, but to recover to grow at 4.5% in 2009 as housing construction levels out at a sustainable level. Inflationary pressures will ease, but unemployment is likely to increase.

The Irish economy has transformed in recent years. It grew by 5.1% in 2005, half a percentage point faster than in 2004, driven by strong domestic demand and positive net exports. This continued the remarkable performance of the past decade, during which Irish incomes per capita have caught up with the OECD average. The forecast is for more strong growth in 2006-2007, with unemployment (4.2%) to remain relatively low.