Davy increases Irish economic growth forecast

Irish stockbroker Davy has raised its forecasts for Irish economic growth for this year and next on the back of continued strong exports and an uptick in domestic consumer demand.

Davy also believes the rate of unemployment will drop to 7 per cent by 2017.

However, it has raised concerns that Government spending discipline could slip ahead of the next general election and has warned that constraints in housing supply could hinder growth.

Giveaway budget

Davy’s projections do not factor in a giveaway budget this year by Minister for Finance

Michael Noonan

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The broker has pencilled in GDP growth of 4.8 per cent for 2014 and revised its forecasts for the following two years. It is now predicting growth of 3.7 per cent this year and 3.4 per cent in 2016. This implies that Ireland’s GDP will reach its 2007 pre-recession peak this year – 12 months earlier than Davy had expected.

“The key reason for the upward revisions to our forecasts is Ireland’s export performance,” the report’s author Conall MacCoille states.

“ICT services, the pharmaceutical sector and indigenous Irish manufacturers are all performing well and we expect that Ireland will continue to compete effectively for foreign direct investment despite the end of the ‘double-Irish’ tax structure.”

Davy expects the unemployment rate to fall below 10 per cent by the middle of this year and to 7 per cent by 2017. In December, the rate fell to 10.6 per cent, its lowest level since February 2009.

It expects consumer spending to rise by 1.8 per cent this year, citing lower oil prices and the benefits of certain tax cuts in Budget 2015. The broker sees earnings growth this year of 1.5 per cent, 2 per cent in 2015 and 2.4 per cent in 2016.

Davy does not believe that a potential slowdown in house prices following the introduction by the Central Bank of Ireland of tighter loan-to-value rules for new mortgage lending will threaten the recovery.

It said Irish house prices are currently close to five times average incomes, a similar level to Britain, adding that the new mortgage limits could “stop a new [house price] bubble forming”.

But it has raised concerns about a lack of construction activity and does not believe it will reach the 25,000 a year needed to satisfy “natural demographic demand”.

Hinder growth

“We are concerned that supply constraints in construction could hinder growth, and we are only pencilling in housing completions of 13,100 in 2015, 15,200 in 2016 and 17,500 by 2017,” Mr MacCoille said.

Some 11,000 house completions were recorded last year in Ireland, ahead of Davy’s projection of 9,850.

Davy raised the prospect of spending discipline being relaxed this year as the economy continues to recover and the Government looks towards the next election.