Goodbody raises domestic demand forecast to 2.5 per cent

Domestic demand is accelerating on the back of a rebound in investment but the Government would be wrong to abandon austerity measures, according to a new report from Goodbody.

In its latest economic outlook, the stockbroker has revised its forecast for domestic demand. It expects domestic demand to grow by 2.5 per cent this year and 2.7 per cent in 2015, compared to a previous estimate of 1.5 per cent and 2.2 per cent. Its GDP forecasts are left largely unchanged at 2.6 per cent for 2014 and 3.1 per cent for next year.

Goodbody said the recent National Accounts data, which showed a 2.3 per cent quarterly decline in the last quarter of 2013 was “nothing more than statistical noise with the more encouraging signs on the Irish economy very much in train.”

The stockbroker said that investment grew by 25 per cent in the last quarter of 2013, the fastest rate of growth on record. It expects growth to continue, led by a rebound in business investment and the ongoing recovery in the property market.

Goodbody said that while still high, it expects the unemployment rate to drop below 10 per cent next year. According to the latest figures from the Central Statistics, the unemployment rate fell to 11.8 per cent in March, the lowest level in almost five years.

The stockbroker warned however, that while the domestic economy is very much in recovery mode, the Government should be wary of abandoning austerity too quickly.

“Stronger domestic momentum means that budget deficit targets look readily achievable but it would be wrong to suggest that the job is done. The debt level will fall in 2014 for the first time in a decade, but at 122 per cent, Irish sovereign debt remains high in both an historical and international context. At this level, Ireland does not have much room for manoeuvre in the event of another international shock, such as a long period of low inflation or even deflation in the euro area,” said Goodbody chief economist Dermot O’Leary.

“With a general election only two years away, Government may wish to ease back on austerity. While we believe there is scope to reduce the planned €2billion in austerity measures in Budget 2015 by up to €500million, it would be unwise to abandon the programme completely, especially when Budget 2015 could prove to be the last of a long and painful period,” he added.

Goodbody said that following a fall of 1.1 per cent last year, it expects consumption to recover slowly in 2014. It said the large debt burden on consumers will slow recovery and predicts growth in consumption of just 1.3 per cent and 1.6 per cent in 2014 and 2015 respectively.

It also warned that recovery in exports will be somewhat offset by increases in imports this year.