Davy predicts economy still has plenty of room to grow

Official estimates underplay the amount of room the economy has left to grow with many indicators still far below pre-recession levels despite recent improvements.

That’s the view put forward by Davy Stockbrokers in their monthly economic bulletin which indicates estimates from the International Monetary Fund and European Commission that Ireland’s output gap — the difference between actual and potential GDP — is among the smallest in the euro area at -1% is inaccurate and overly pessimistic.

The two institutions, both of which are part of the troika along with the European Central Bank, consider Ireland and the UK to be at similar cyclical positions despite Irish GDP still lagging some way behind pre-recession levels, unlike the UK economy which surpassed its GDP peak in the second quarter of the year.

However, ranking Ireland’s output gap alongside the UK’s assumes persistent damage to Ireland’s productive capacity is much greater than that endured by its neighbour, according to Davy.

“This is an especially gloomy view of the Irish economy’s ability to bounce back from the recession and the degree of spare capacity left in the economy.

Put another way, it assumes the persistent damage to Ireland’s productive capacity and labour market from the financial crisis and construction sector bust has been far larger than in the UK,” according to the report compiled by economists Conall MacCoille and David McNamara.

Davy’s research suggests that a number of sectors may have the capacity to bounce back strongly, not just construction which remains far below its peak level of activity.

Despite a rebound in retail sales volumes in 2014, overall consumer spending is still 8.2% below peak levels, which suggests there is still room for the retail sector to bounce back as household incomes slowly recover. Similarly, investment spending is still lagging behind the pre-recession average of 22.5% of GDP at 15%; and GDP and GNP are 3.5% and 5.4% below pre-recession peaks respectively.

All of these factors, according to Davy, suggest that while a “robust recovery is firmly established”, there remains room for growth.