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.