Recession ‘to bottom out in early 2010’

THE economy has weathered the worst of the recession which is expected to bottom out early next year, according to Davy Stockbrokers.

Economist Rossa White in Davy’s latest analysis of the economy says that all available indicators suggest that the Irish recession is past the most acute point and he said it is becoming clear that January-February was the most intense phase.

“The Irish economy entered recession in the third quarter of 2007. It has lasted for seven quarters already, and that recession is not yet finished.

“But the economy is probably past the worst. We think the first quarter of 2009 marked the most aggressive point of this sharp recession. Looking ahead, we expect the economy to bottom in early 2010,” he said.

Mr White said a key plank of its analysis is that the sharp decline in consumer spending levels off.

“Real incomes will drop again but not by as much as in 2009. Incomes will be hurt by lower employment, wages and higher taxes but will be boosted by generous social transfers, lower interest rates and the drop in consumer prices,” he said.

On the positive side, Davy points out that manufacturing has actually improved in the past few months, based on surveys and hard data.

“We expect multinational industry to continue to fare better than the indigenous sector.

“It will likely be a repeat of 2001-2002, when the advantages of booking value add in Ireland meant that foreign-owned industry remained fairly resilient.

“We expect manufacturing will trough late in 2009 as indigenous industry stabilises and multinational industry records an increase in output due to an improvement in external demand,” he said.

And the Davy team is more optimistic than previously about longer term prospects.

“The rapid adjustment in private sector wages highlights Ireland’s labour market flexibility and has already boosted export competitiveness. But high household and financial debt remains a concern,” he said.

Mr White is also bullish about the Irish stock market and points out Finland had a similar construction and associated banking crisis in the early 1990s.

The subsequent decline in economic activity and employment looks eerily similar to the Irish experience. “The Finnish economy bottomed in Q2 1993. But the stockmarket hit the floor eight months in advance in September 1992.

Relating that to Ireland, we reckon that the ISEQ troughed in early March. Its decline from its peak (20 months previously) was more than 80%. That compares with a peak-to-trough drop of 73% in Finland,” he said.