Davy predicts exit from recession

THE economy should exit from recession in the first half of this year, according to Davy Stockbrokers.

However, Davy Stockbrokers chief economist Rossa White believes Ireland has not got the credit for the tough austerity measures the Government has taken.

“The Irish economy gradually stabilised throughout 2009. Note that the majority of the damage was done in the year to Q1 2009, a period when GNP fell 13% in volume, consumer spending dropped 10% and the budget deficit exploded. Since Q1, there have been a number of more positive developments,” he said in a note to clients yesterday.

Mr White points out that GNP declined 3.1% in volume in the following two quarters, and the drop in Q3 was the smallest since Q1 2008. “The recession has continued, but it has been a slow grind lower in contrast to the collapse witnessed in the year to Q1 2009,” he said.

Mr White said the economy is set to exit from recession in the first six months of this year but added that the recent data flow has been slightly disappointing.

“‘Core retail sales dipped below the April low in October, although industrial production in the multinational sector remains robust. We expect the high frequency indicators to progress enough in early 2010 for the economy to bottom by March or April,” he said.

He said the country should expect investor sentiment to improve as the economy begins to grow again and the realisation dawns that the solvency risk has been minimised.

“That will also benefit the Irish equity market in time.”

He said to outlook for the reaction of Irish households to be one of the surprises of 2010. The savings ratio soared in the 18 months to mid-2009 as a consequence of rising unemployment, the fiscal position and the loss of household wealth.

He said there are two main reasons for this: Ireland’s demographics are more favourable based on the life cycle theory of consumption, and the spending culture is not quite in line with Europe, albeit it has moved in that direction.

Mr White said there are three main risks to Irish economic growth.

“First, the banking resolution may be delayed or could falter. If the loan transfer to NAMA drags out or recapitalisation becomes problematic, it will restrain credit provision.

“Second, Ireland cannot afford the global recovery to slip significantly, given the still fragile domestic environment. But our baseline case is that global recovery becomes sustainable as the second-round effects such as business investment kick in.

“Third, rising interest rates (both short and long term) remain a threat.

The ECB may decide to normalise rates more quickly than we anticipate (two rate hikes of 25 basis points in H2 2010), or Irish banks may get the balancing act wrong by increasing (currently low) margins too quickly on mortgages and business loans,” he said.