Ireland and Germany take lead roles in euro zone recovery

Ireland and Germany are the only euro zone countries likely to see a "significant" pick-up in growth next year, according to Bank of America Merrill Lynch's economic outlook for 2014.

The bank also suggested the Irish Government’s decision to exit the bailout without a backstop would have been heavily contingent on the recent bank stress tests not throwing up “any major problems”.

Publishing its predictions for the year ahead yesterday, the bank’s global research unit said it expected only “timid recovery” in the euro zone next year, driven by exports and less austerity. “Only Germany’s and Ireland’s recoveries are likely to really gather steam, albeit for different reasons,” it said.

While Germany’s recovery was being fuelled by domestic demand, Ireland’s return to growth was export-led, it said.

“With Irish exports remaining heavily orientated towards advanced economies, stronger growth in all of the UK, US and euro area in 2014 should help buttress the recovery, with the drag from the pharmaceutical patent cliff this year also fading.”

The bank said the Republic’s gross domestic product (GDP) would grow 1.9 per cent next year, more than twice its 0.8 per cent projection for the euro zone, and ahead of the 1.6 per cent forecast for Germany.

The forecast for Ireland was slightly lower than the Department of Finance's projection of 2 per cent but significantly higher than the 1.1 per cent forecast made yesterday by the Nevin Economic Research Institute.

While domestic demand in Ireland had stopped contracting it would remain weak next year, the bank said.

Poor lending conditions were also highlighted as a downside risk to recovery here, with lending to both households and businesses continuing to contract at an average of 5 per cent a year.

Having chosen to exit the bailout programme without a credit line, there would be a focus on Ireland’s ability to deliver on its fiscal deficit targets, its bond market funding targets and meet growth expectations, it said. The report was written before the recent bank stress tests, but it noted that the Government’s decision not to seek a backstop on exiting the bailout was most likely predicated on these tests not revealing any major problems.

"The thinking was there would have been some knowledge of how these test were going and if the numbers were headed towards a significant recapitalisation of the Irish banking sector then you would rather have a credit line in place," Bank of America Merrill Lynch economist Nick Bate said.

On the global economy, it said: “For the first time in several years, we approach the New Year with no major cloud on the horizon.”

It expected GDP growth in the US to accelerate from 2.6 per cent to 3 per cent in 2014.