Davy Stockbrokers published an economic report The Irish economy - An Assessment of Risks and Forecasts 20082010 today.
|Source: Davy Stockbrokers: The Irish economy - An Assessment of Risks and Forecasts 20082010|
The report, which was produced by Robbie Kelleher, Head of Research and Chief Economist, and economist Rossa White, is significant because it looks beyond the impact of the SSIA bonanza on the Irish economy and focuses on what is likely to happen when the current boom loses some steam.
Davy says that it is highly likely that that the pace of growth of the Irish economy will slow in the later years of this decade. After 2007, consumer spending growth will be impacted by the withdrawal of the SSIA stimulus and the long-anticipated peak in the housing market may finally have occurred. Davy says that it is difficult to see what sectors could replace this loss of momentum.
The following is a summary from the report:
STRONG TAILWINDS FOR 2006 AND 2007
We see a number of forces continuing to impart a strong impetus to the Irish economy in 2006 and 2007:
- Continued healthy growth in consumer incomes at a time when the savings ratio is high and c.16bn in Special Savings Incentive Accounts (SSIAs) is due for release;
- A continuation of the recovery in non-residential investment that has taken place in recent years;
- Continued buoyancy in housing;
- A uniquely favourable budgetary position which should result in another generous Budget next December; and
- Powerful demographics: we estimate that the population expanded by 2.5% in the year to April last.
- Taken together, these forces should be sufficiently strong to deliver GNP growth of 6% in 2006 and 5% in 2007.
ASSESSING THE RISKS: HOUSING VOLUMES AND PRICING
Is there a danger that these trends will eventually be undone by a volume and/or price adjustment in the housing market?
- The volume of housebuilding in Ireland remains exceptionally high by international standards. More than 20 houses per thousand of population will be built in 2006; that compares with a European average of five per thousand.
- However, household formation in Ireland now appears to be running at close to 60,000 per annum. That reflects the pick-up in the growth rate of the population and a continued reduction in household size.
- If these trends are sustained, the demand for new houses could come close to, or exceed, 80,000 per annum in the next number of years.
- Some downward adjustment is likely in the medium term, though the magnitude of the adjustment may be less pronounced than was feared a number of years ago.
- There are no such mitigating factors to explain the pace of house price inflation in Ireland. By most measures, house prices in Ireland look stretched and a period of stabilisation or decline looks inevitable at some point. However, we do not have the tools to determine with any confidence the timing or size of such an adjustment.
ASSESSING THE RISKS: THE ACCUMULATION OF DEBT
- The level of household debt has increased more than sevenfold over the last ten years. By the end of 2006 the ratio of debt to income will exceed 150%.
- But this accumulation of debt has occurred at a time when the savings ratio has been high and rising. This means that assets have been accumulated at a much more rapid pace than liabilities.
- The net worth of the personal sector increased from less than 100bn in 1995 to almost 500bn in 2005. This year alone we expect the net worth of the personal sector to increase by more than 70bn, the equivalent of 70% of annual disposable income.
- In the event of an adjustment in house prices, this build-up of net assets may limit the damage to consumer confidence.
- In relation to interest rates, we reckon that a one-percentage-point increase reduces personal sector cash flow by the equivalent of 1% of disposable income.
FORECASTS FOR THE IRISH ECONOMY 20082010
It is highly likely that that the pace of growth of the Irish economy will slow in the later years of this decade. After 2007, consumer spending growth will be impacted by the withdrawal of the SSIA stimulus and the long-anticipated peak in the housing market may finally have occurred. It is difficult to see what sectors could replace this loss of momentum.
The extent of any slowdown will be crucially impacted by the size of the correction in the housing market.
We have constructed three scenarios:
- Baseline scenario: House completions slow progressively from a peak of 90,000 in 2006 and 2007 to 85,000 in 2008, 80,000 in 2009 and 75,000 in 2010. House prices stay flat after 2007.
- Optimistic scenario: Annual house completions stay at 90,000 up to 2010. House prices rise at 5% per annum
- Pessimistic scenario: House completions drop sharply to 80,000 in 2008, 70,000 in 2009 and 60,000 in 2010. House prices fall by 5% per annum.
Our model produces the following outcomes:
- Baseline scenario: GNP grows by 3% in 2008 and by 2.5% per annum in 2009 and 2010.
- Optimistic scenario: GNP grows by 3.75% in 2008 and by 3.25% per annum in 2009 and 2010.
- Pessimistic scenario: GNP growth slows to 1% per annum in the three years 20082010.