Irish economy likely to contract 4% in 2009 - Davy

The Irish economy is likely to contract 4 per cent this year as unemployment rises to over 10 per cent, according to a report from Davy Stockbrokers.

Ongoing credit restrictions will see fixed investment fall and asset prices continue to decline this year with no improvement forecast until 2010. "We assume that global conditions will improve somewhat, but not dramatically, in late 2009/ early 2010."

Rossa White, economist with Davy, said the sharp fall in consumer spending last year was one of the most remarkable changes in the Irish economy.

Consumers have reassessed their future income prospects in the context of rising unemployment and steep falls in the value of pension funds and property, he said.

As a result consumers were likely to save more of their income this year leading to further a contraction in consumer spending.

"The volume of consumer spending will drop 3.8 per cent on average [in 2009] and 2.5 per cent in 2010. The consequence of a three-year period of strained consumer incomes is that spending may end up 2 per cent lower in cash terms in 2010 than it was in 2007," he said.  

Housing completions are expected to total 25,000 this year but the stock of unsold houses may rise to 60,000 as sales remain slow.

The decision to maintain the capital investment programme in the Natwas one of the most encouraging aspects of the Budget, according to the report, and this is likely to account for 5.5 per cent of GNP this year, the highest in the euro zone area, according to the report.

New commercial building is expected to contract by 10 per cent this year and by 25 per cent in 2010.

Predicting the sector will continue to contract until the end of 2010 at the earliest, the report predicts another 100,000 net jobs will have been lost in construction by then.

However, the sector facing the largest number of job losses is services, which is likely to see net employment fall by 115,000 by the end of 2010.

In relation to equities the report noted that Irish financial stocks were the worst performing in an Irish and European context.

"The ISEF index of financial stocks declined by 91.4 per cent in 2008, underperforming the UK's FTSE 350 banks index (-56.8 per cent). . . The S&P 500 and E300 banks indices fell by 47.8 per cent and 64.1 per cent respectively."

However, one upside identified by Davy is the relative strength of a number of Irish companies in terms of their low debt/EBITD ratios and strong cash flow.

Among these “world-class” companies CRH has the “strongest balance sheet” in its sector with a debt/EBITD ratio of 2.3 times, while Kerry, Origin and C&C all have ratios below 2 times.

The Davy report said a number of Irish companies such as Ryanair, Glanbia and Smurfit Kappa Group have among the strongest balance sheets in their sectors globally.