Irish GDP is understated because of the way the CSO measures production in the pharmaceutical sector, according to Davy Stockbroker chief economist, Conall MacCoille.
Irish-based pharma companies are manufacturing a greater quantity of generic drugs, which leads to an overall reduction in price but not volume, he said. But the CSO treats generic drugs as new products, so it is measured as a reduction in volume, not price and consequently real GDP growth is being erroneously understated, he added.
Speaking at the release of Davy’s Economic Outlook for 2014, Mr MacCoille estimates that true GDP growth may have been 0.1% over the first six months of this year and not the 1.1% contraction according to CSO data.
Overall, Davy forecasts that GDP growth will reach 1% this year and 2.5% next year, which is much more bullish that the Department of Finance’s forecast of 2% and the EU Commission’s forecast of a 1.7% GDP growth rate next year.
Moreover, it forecasts that consumer spending will increase by 1.5%; investment will increase by 8% on the back of an increase in activity in the construction and manufacturing sectors; and, exports will rise by 3.1%.
Mr MacCoille has pencilled in a budget deficit of 4.4% by the end of next year and a current account balance as a percentage of GDP of 7.1%.
Most sectors of the economy are primed for growth. However, the banking lending remains constrained due to challenges in working through mortgage arrears and other loan losses.
Davy’s global strategist, Donal O’Mahony, said the credit ratings agency, Moody’s is preparing to “shift through the gears to restore Ireland’s investment grade status, thereby bestowing a further strong impulse towards lower bond yields and spreads”.
Moody’s downgraded Irish debt to junk status in Jul 2011. Mr O’Mahony said that Irish bond yields have returned to sustainable funding levels.
Moreover, across the eurozone there is a tightening in spreads between core and periphery, he added.
It is believed that Davy Stockbrokers will finalise the refinancing of its €140m loan with the IBRC over the next few weeks. It is understood that there is no other party bidding for the stockbroking firm’s loans.
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