Davy upgrades growth forecast for economy to 6%

Davy Stockbrokers has upgraded its growth forecast for the Irish economy to 6 per cent while noting the possibility of Brexit and further political uncertainty at home posed serious threats to recovery.

The firm said the upgrade reflected the exceptional 7.8 per cent expansion in gross domestic product (GDP) last year.

“This momentum means that even if GDP flat-lined through 2016, the economy would still expand by 3.3 per cent in the calendar year,” inhouse economist Conall MacCoille said.

However, recent retail sales and employment data continue to point to rapid growth in the first quarter of 2016, he said.

Davy also upped its growth forecast for 2017 to 4 per cent, significantly up on its previous prediction.

The firm’s predictions for GDP growth are significantly higher than the Government forecasts, set out in the October budget.

At that point the Government forecast 4.3 per cent GDP growth for 2016 and 3 per cent for 2017, albeit this was before the better-than-expected out-turn for 2015.

“The bigger picture is that Ireland’s economy is still in ‘catch-up’ mode, with consumers and domestic companies only recently joining in the recovery,” Mr MacCoille said.

He said exports had “been shielded” from signs of weaker growth in key trading partners such as the euro area, UK and US by their concentration in defensive sectors such as pharmaceuticals, agriculture and ICT services.

“The domestic recovery is being sustained in 2016 by tax cuts and falling oil prices, helping households’ real incomes, coupled with the first period of sustained wage growth since the recession began,” he said.

In its latest economic outlook, the brokerage noted that uncertainty over Britain’s impending vote on EU membership could cause companies to defer investment plans.

Exporters could also be faced with a sharp sterling depreciation, close to parity with the euro, it said.

Davy said domestic political uncertainty here would not be sufficient to hurt growth prospects significantly in the short term with a new government likely to involve the mainstream parties, Fianna Fáil and Fine Gael, rather than radical alternatives.

“However, should no stable government emerge, it could accentuate the concerns regarding Brexit,” it said.

Despite the downside risks, Davy said it expected the domestic economy to continue on a rapid growth trajectory.

It predicted consumer spending, the main driver of domestic demand, to grow by 3.7 per cent in 2016 and investment by 7.5 per cent.

It also forecast residential property prices would rise by about 5 per cent this year, albeit with bank lending contracting again.