Cantillon: bulls are back ahead of budget day

Davy’s chief economist sees recovery spreading into domestic economy after export-led turnaround

“Tax cuts and lower oil prices have increased consumer spending, and the weak euro has helped competitiveness, with exports benefitting”

“Tax cuts and lower oil prices have increased consumer spending, and the weak euro has helped competitiveness, with exports benefitting”

 

The fourth quarter of the year looms and, with it, a new batch of economic forecasts. Ahead of the budget this day fortnight, a cascade of data is on the way.

The bulls are back. Out of the traps today comes Davy, which has its sights on a 6.5 per cent expansion in GDP for 2015 and 4 per cent for 2016. This would have seemed like rather tasty stuff a few months ago, but the growth acceleration in the first half of 2015 changed the scene. Davy’s previous forecast pointed to 3.7 per cent growth this year and 3.4 per cent growth next year.

In line with others, Davy’s chief economist, Conall Mac Coille (right), sees recovery spreading into the domestic economy after the export-led turnaround.

“Several tailwinds have also accelerated the pace of expansion in 2015,” he says. “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-€1.5 billion budget giveaway, worth 0.7 per cent of GDP, will sustain above-trend GDP growth.”

Critics of the strategy argue the strong growth rate obviates any need for more stimulus. But Mac Coille says there’s still spare capacity in the tank, in the retail and construction sectors particularly.

“Irish employment is still 9.7 per cent below peak levels,” he says, “and the unemployment rate at 9.5 per cent in July still suggests that the output gap is negative.”

In public at least, the Government’s budget plan is predicated on a 2.3 per cent of GDP deficit this year and 1.5 per cent next year. However, Davy says a deficit at 1.7 per cent of GDP is within grasp for 2015 and 1.1 per cent of GDP for 2016.

For all that, a €600 million supplementary health estimate to come will take some of the gloss off the deficit this year and next. The glittering prize of a balanced budget is still a little further away.

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