Outlook for economy upgraded

For the first time in three years, Davy Stockbrokers has upgraded its outlook for the economy, according to a briefing document issued this morning.

Davy upgraded its growth outlook for Ireland from 0.5% to 1.3% and forecast 2.1% GDP growth for 2014.

Davy chief economist Conall MacCoille said it was the first time since he had joined the firm that it had upgraded its growth forecasts for Ireland.

However, he admitted that the stockbroker may have been too conservative in 2011.

“Since our last forecast in Oct 2012, developments in the Irish economy have been broadly balanced. Domestic demand has been a little stronger than expected,” Mr MacCoille said in a briefing note.

“Offsetting that good news, the slowdown in Irish goods exports through 2012 has been especially severe.”

The newfound optimism in Ireland’s largest stockbrokers is as a result of better than expected figures emerging from the third quarter of last year.

The figures for the second half of last year were stronger than had previously been expected as investment flowed into Ireland.

“A big surprise in the GDP data [for the third quarter] was the surprising strength of investment spending, up 10% on the year,” Mr MacCoille said. “This is the strongest expansion since [the first quarter of] 2007, led by capital expenditure on machinery equipment. It appears that investment projects in the multinational sector, postponed during 2009 and 2010, came on stream in 2012.”

The report is not all good news, though, with Davy forecasting that the fourth quarter of this year could be very rough as the patent cliff hits the Irish GDP figures.

While there has been much speculation on the effect that the patent cliff could have on Ireland’s economy, it is the more mundane decline in the health of the eurozone that is dragging Irish exports down.

“The broad trend is that Irish exports have slowed sharply due to the euro area recession. Our measure of Irish export demand [world imports weighted according to Irish export shares] has slowed from 3.6% growth in 2011 to just 1% in 2012,” he said.

“Output in the labour-intensive traditional manufacturing sector has closely followed the euro area cycle in industrial production. Indeed, industry was the worst-performing sector in terms of jobs growth in 2012, with employment down 6,300m.”

However, Mr MacCoille found a silver lining in the patent cliff, which Davy said knocked 1% off of Irish GDP in the final quarter of 2012.

He said that although Davy is not an expert in the pharmaceutical field, it was possible the drop-off in production could be taken up by new jobs in the research and development of new drugs.

Overall, Davy believes that the employment market will begin to improve, with the hardest hit sectors — hotels, restaurants, retail, and construction — already having been cut to the bone. The stockbroker is now forecasting that private sector employment will grow more than 1%.

“There is growing evidence that employment in the hardest hit sectors is finally beginning to level off,” said Mr MacCoille. “We expect the pace of private sector employment growth to accelerate above 1% in 2013.

“Despite all the good news, the domestic economy on the high street remains weak. The burden of taxes and debts on households will continue to hold back the recovery.

“Households and SMEs continue to pay down bank debt. Further reductions in household and SME debt adjustments are likely, which will hold back the recovery in domestic demand. As in previous forecasts, our projections for GDP growth still rely on a strong contribution as from net trade.


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