Irish Economy: Davy Stockbrokers has cut its macro forecasts for Ireland for 2008 and 2009 and now expects GNP volume growth of 1%, revised from 1.7%, in 2008 and 2% in 2009, cut from a level of 3.4%.
Economist Rossa White says that the Irish economy has been hit with a triple whammy early in 2008: tighter credit, ECB hawkishness and associated exchange rate appreciation.
Conditions have deteriorated for households in 2008 and the forecast for consumer spending was previously 2.5% in volume. But Davy now expects only 1% thanks to a weakening labour market, tighter credit, higher inflation and a negative wealth effect. Davy says at least goods exports were relatively robust in volume terms in the first quarter: "we stick with our forecast absent any data on services year-to-date." it says.
The bigger revision to growth forecasts is for 2009:Davy projects 2% real GNP compared with 3.4% before. New home sales improved earlier in the year, but have slowed recently as a result of tightening mortgage availability and no short-term prospect of interest rate cuts. The broker now expects 25,000 house completions in 2009 versus a previous forecast of 40,000. The unemployment rate is set to reach 6.1% by year-end and 7% by end-2009 — the rise limited by lower net migration. But the Government is not going to have as much fiscal room as was previously thoughtt: based on its Budget 2008 estimates, it may breach the 3% deficit limit in 2009. Davy says that the recovery towards trend may be delayed until 2010.
Davy on the Irish economy Report
Rossa White's summary on report:
Trimming our 2008 GNP volume growth estimate to 1%
We have cut our 2008 growth forecast due to deteriorating conditions for consumers. Our forecast for consumer spending was 2.5% in volume, but we now expect only 1% due to a weakening labour market, tighter credit and a negative wealth effect.
As a result, we have trimmed our GNP volume growth estimate for 2008 to 1% from 1.7%.
Goods exports were robust in Q1, and we are sticking to our forecast in the absence of any data on services year-to-date.
Reducing our 2009 GNP forecast to 2% from 3.4%
We are forecasting 2% real GNP for 2009 compared with 3.4% previously.
We do not expect the housing market to bottom in 2008. We now forecast 25,000 house completions in 2009 versus our previous figure of 40,000. That subtracts over 1% directly and indirectly from GNP.
We have pencilled in a 10% decline in private non-residential building for 2009.
The unemployment rate is set to reach 7% by year-end 2009 – the rise limited by lower net migration.
Based on its Budget 2008 estimates, the government may breach the 3% deficit limit in 2009.
The economy may not bounce back to trend until 2010
In our research note Beyond the housing shock (February 26th 2008), we argued that potential growth in Ireland is a healthy 3.5-4%. However, we do not see the economy growing in line with trend until 2010.