Bank of Ireland has increased its outlook for the economy, saying that the country will weather any currency shocks from abroad.
The recent slump in sterling against the euro, amid fears about the UK leaving the EU and delayed British interest rate hikes, has significantly eroded advantages for Irish exporters.
But Bank of Ireland forecasts that sterling will strengthen again substantially, to reach 70 pence by the end of the year, and up from around 77.5 pence currently.
The bank — which is 14% owned by the Government–and which delivers its 2015 earnings on Monday — projects GDP will surge 5% in 2016, up from its previous forecast of 4.8%.
And significantly, despite the recent global stock market rout that reflects growing fears of a world recession, the bank sees no imminent threat to Ireland’s export-driven economy, and projects GDP will grow strongly again in 2017, by 4%.
Chief economist Loretta O’Sullivan said that “robust exports and investment, employment growth and sustained consumer spending” that drove the economy last year will continue to drive GDP.
“As always, there are risks to these forecasts. Potential headwinds include uncertainty about the global economy and the outlook for sterling, though on the upside, housing construction could respond more rapidly to meet demand than currently assumed,” the bank said.
However, as “trading partner demand remains positive” along with other factors, it projects exports will grow 8% this year, albeit slightly slower than the 12.5% posted expansion last year.
The bank said that pessimism about the British economy is overdone and expects the continuing strength of the UK economy to spur the Bank of England to hike rates at the end of the year, though Brexit uncertainty could still weigh on sterling.
“Our current forecasts envisage sterling averaging around 76 pence over the first half of this year, before strengthening to 73 pence by end of September and 70 pence by year-end,” it said.
“This implies an average euro-sterling exchange rate of 74 pence for 2016 as a whole, compared to about 72.5 pence in 2015,” the bank said. It sees low oil prices acting as a “tailwind for consumer spending” which, with more people working, will help boost consumer spending this year and next.
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