Irish economy set to grow by 6.5% in revised forecast

The Irish economy is now expected to rise by 6.5 per cent this year and 4 per cent next year, according to a revised forecast issued by Davy.

The stockbroking firm has previously indicated that Gross Domestic Production (GDP) growth would grow 3.7 per cent in 2015 and by 3.4 per cent in 2016.

Davy said its revised forecast reflected a sharp rebound in consumer spending and an improving labour market. It added that the weakness of the euro had also benefitted the export sector.

Chief economist Connall Mac Coille noted that GDP growth had been exceptionally in the first six months of 2015, up 6.9 per cent versus the same period a year earlier. Irish GDP is now 5.7 per cent above its pre-recession peak and the recovery is strong than in both the euro zone and UK and will soon outpace the US.

“The on-going recovery, led by export growth and foreign direct investment, is now spreading into the domestic economy. Several tailwinds have also accelerated the pace of expansion in 2015: tax cuts and lower oil prices have increased consumer spending, and the weak euro has helped competitiveness, with exports benefitting. Looking forward, the €1.2 billion to €1.5 billion Budget giveaway, worth 0.7 per cent of GDP, will sustain above-trend GDP growth,” said Mr Mac Coille.

Davy said it expects the unemployment rate to average 9.4 per cent this year before declining to 9.2 per cent in 2016 and 7.4 per cent in 2017. It also forecast that consumer spending would rise 3.4 per cent this year and by 3.2 per cent in 2016.

It said the strength of the economy had boosted public finances with government deficit now expected to equal 1.7 per cent of GDP this year before falling to 1.1 per cent in 2016.

The government debt to GDP ratio is expected to fall below 100 per cent of GDP by end-2015 to 98.9 per cent and to 89.9 per cent by 2017. Davy’s forecast does not include any potential reductions in government debt due to state asset sales.

Minister for Finance Michael Noonan recently indicated that a sale of 25 per cent of AIB could take place late next year.

Mr Mac Coille said that while the 12.9 per cent export growth expected this year had been artificially inflated by contract manufacturing in the pharmaceutical sector, industrial production among indigenous traditional manufacturers had also grown significantly.

Private sector earnings grew by 2.4 per cent in the year to June and Davy said it expect tax cuts in the Budget to help incomes

“Earnings growth will allow house prices to rise without stretching affordability and will enable banks to expand mortgage lending without falling foul of the new Central Bank rules. Rising household and corporate incomes will support residential and commercial rents and asset prices,” said Mr Mac Coille.

“Reflationary pressure will also start to lift Irish households out of the difficult process of balance sheet repair, impaired so far by deflation. Irish household debt is now 165 per cent of disposable incomes - still high but now falling rapidly,” he added.