Stockbrokers warn credit will be harder to get as economy worsens

CREDIT availability is likely to tighten further this year, according to one of the country’s leading stockbrokers which yesterday lowered its economic forecasts.

Stockbroking firm Davy trimmed its 2008 and 2009 economic forecasts due to the “deteriorating credit and currency environment”.

Davy now expect that real GNP will expand by 1.7% this year, compared with its previous forecast of 2%. Next year it projects growth of 3.4% versus its previous call of 3.6%. GNP or gross national product is the total value added from domestic and foreign sources claimed by residents of a country.

Davy economist Rossa White said: “We are adjusting our forecasts to account for the ongoing tightening of financial conditions in the Irish economy on two fronts: credit availability and the strengthening exchange rate. The tightening of credit will be felt most keenly in private commercial building. However, the risk to our forecast for next year is still on the downside. If housing starts do not bottom in the second half of 2008, we will have to cut our 2009 forecast once more.”

Davy also said that sterling weakness is more pernicious for Irish exports than the dollar.

It said St Patrick’s Day was a landmark event in a less favourable sense because, for the first time since October 1996, the old Irish punt reached parity with pound sterling.

“Most exports to the US are intra-subsidiary and are priced in dollars. Moreover, the employment share of those mainly US-owned enterprises is not as big as their export share. In contrast, indigenous Irish exporters concentrate their efforts largely on the British market.

“Crucially, their share of employment in the economy is bigger than their share of total exports. The sterling/punt exchange rate has moved unfavourably by 14% in the space of six months. Therefore, we have effectively downgraded our export forecasts slightly for 2008 because the 2007 base was some 0.25% higher than we had predicted,” said Mr White.

Davy also said Irish economic activity slowed markedly at the end of last year as the housing downturn finally had a sizeable negative impact.

On a seasonally adjusted basis, the volume of Irish GNP was 2.2% lower in October-December than it was in July-September, which Davy said was the biggest contraction in the economy since the second quarter of 2001.

“Some of the positive secular trends stayed intact. Consumer spending remained robust, and service exports continued to expand at a pace well into double-digits. But the credit crisis touched the economy: non-residential building activity fell for the first time in two years,” said Mr White.