Davy lowers its growth forecasts

A WEAKENING in demand for exports, coupled with rising levels of consumer saving, has led Davy Stockbrokers to lower its growth forecasts for the economy for this year and next.

In a report published today, Davy says it expects the Irish economy — in GDP terms — to grow by 1.1% this year and by 1.7% in 2012. This new forecast is down from Davy’s previous expectation of GDP growth of 1.6% for 2011 and 2.4% in 2012.

However, even Davy’s revised outlook looks healthy against other forecasts. Jim Power of Friends First recently opined that Ireland would see a 0.8% GDP fall this year, followed by a 1.9% rise in 2012; Bank of Ireland sees moderate increases — of 0.5% and 0.9% this year and next; and the Central Bank, which has steadily been lowering its forecasts since the turn of the year, sees growth of just 0.8% for 2011.

“Since our last forecast, indicators of economic activity in Ireland’s main trading partners have deteriorated. A key factor behind our downside revision to GDP is the weaker demand for Irish exports. Consumers have increased their savings, pushing down on spending, despite the negative impact on real incomes from the fiscal adjustment. The potential for a more severe global downturn poses significant downside risks to our projections,” said the author of the report, Davy’s chief economist, Conall MacCoille.

Mr MacCoille added that, notwithstanding some welcome adjustments to its bailout terms, Ireland really has little room for complacency as overall progress in terms of reducing the country’s deficit is “modest”. He also said that more is required to reassure consumers and international markets and to create a margin of comfort to help withstand a potentially serious downturn or double-dip recession.

While Mr MacCoille acknowledges already-made expenditure cuts to welfare and capital spending, his report makes the case for more ambitious cuts in public sector pay where there has been relatively little adjustment to date.

“Exchequer returns for the year to August remain broadly on track to hit the Budget 2011 targets. Relatively little adjustment in the public sector pay bill is expected in the coming years. Further reductions in public sector pay levels should be considered to ensure fiscal targets are met. Such action could mitigate the impact on the public finances from a possibly severe downturn in the global economy,” said Mr MacCoille.

Davy’s revised forecast also sees GNP growing by just 0.2% this year and 1% in 2012 (as opposed to initial growth expectations of 0.6% and 1.7%, respectively) and a 3% fall in consumer spending this year — where the company previously expected just a 1.4% fall. A reduction in the unemployment rate will also only be marginal, it added.