Davy forecasts lower economic growth

HOUSE completions will fall by 40% between now and 2008, with unemployment hitting 6% and GNP halving to less that 3%, putting severe pressure on Government finance, according to Davy Stockbrokers.

And Davy economists Robbie Kelleher and Rossa White believe there is more bad news on the way for mortgage owners with another interest rates rise “probably” in November.

With housing starts figures for August showing a decline of 58% year-on-year compared with August of last year, Davy has sharply reduced its forecasts for the housing sector.

“The 12-month running total has now fallen from a peak of over 90,000 last September to just over 64,000 in August. It will probably dip below the 60,000 mark when the September 2007 figures are released in a few weeks time.

“As a result, we cut our forecasts for house completions to 75,000 in 2007 and 55,000 in 2008. Our previous forecast had completions at 80,000 in 2007 and 65,000 in 2008. Actual completions in 2006 were just over 88,000.

“We now expect a near-40% decline in new house completions between 2006 and 2008. Given that the sector accounts for almost 10% of GNP, this clearly has implications for our overall macro forecasts,” it said in an update to its Irish economic forecasts.

The Davy duo point out that year-to-date growth in tax revenue slowed from 12%-13% year-on-year in the early months of the year to less than 6% by August, with revenues €272m behind target.

“By the end of the year, we expect the shortfall to be over €1bn, and we forecast tax revenue growth of less than 5% next year. Nevertheless, the Government is still likely to run a surplus this year, and we believe it can meet its capital spending and tax promises for next year and still incur only a modest deficit of around 0.5% of GDP,” they said.

Davy believes we will have to wait for CSO figures on employment for October before the impact of the housing slowdown becomes clear.

“By then, we expect the overall growth yoy rate to have slowed to less than 2.5% and that the yoy rate for building will be negative. By the end of next year, we expect the yoy rate for the total economy to be down to 0.7% and that construction employment will be falling by almost 10% year on year.

“Already we have seen the unemployment rate move up from a low of 4.2% to 4.7%, and we expect that to reach 6.0% by the end of 2008,” they add.

Davy believes the combined impact of current changes in the Irish economy alters their forecast for GNP growth has been revised from 4.5% to 4.0% in 2007 and from 3.0% to 2.7% in 2008.