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News : Irish Economy Last Updated: Oct 1, 2014 - 11:46 AM

Irish Economy: Davy foresees big bounce-back in coming years; European Commission has doubts
By Michael Hennigan, Finfacts founder and editor
Sep 30, 2014 - 4:38 AM

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Source: Davy

Irish Economy: Davy economists in a note published Monday foresee a big bounce-back in the economy in coming years and say the positions of the European Commission and IMF for example, are too pessimistic.

Conall Mac Coille and David McNamara in the September edition of Davy Economics Monthly, look at two issues. "First, we look at the amount of spare capacity left in the Irish economy and the potential for GDP to continue growing above 4%. Second, we examine the weak Eurozone economy and focus on Italy, where a lack of structural reform is now weighing on growth prospects."

The economists says: "Both the European Commission and IMF estimates suggest that Ireland’s output gap is currently just 1% of GDP, exactly in line with the UK and among the smallest in the euro area. This is despite Ireland’s unemployment rate of 11.2% being well above the UK’s 6.3% unemployment rate. However, these pessimistic estimates should be interpreted in the context of budgetary policy. The IMF and EC Commission’s view that Ireland’s output gap will narrow to zero in 2015 underpins a cautious assessment that the budget deficit is almost entirely structural; that is, the government cannot rely on the economic cycle to naturally close a substantial portion of the remaining budget deficit and should press on with fiscal consolidation. Our view is that the output gap is probably well in excess of 1% of GDP and that budgetary out-turns could still surprise favourably."

The Irish Times reports Tuesday that the "European Commission is putting renewed pressure on the Government to implement €2bn in cuts in the coming budget, echoing the views of both the IMF and the Irish Fiscal Advisory Council."

The Commission fears the strong exchequer figures in the second quarter may not be sustainable for the remainder of the year and has concerns about the “volatility” of Irish quarterly GDP estimates.

Mac Coille and McNamara say in their note: "One key point for Ireland is that labour productivity grew rapidly through the recession as the construction sector shrank and export sectors such as ICT services expanded. Weak labour productivity growth is often cited as a key channel hurting  structural growth prospects in the aftermath of a financial crisis but has not been a feature of Ireland’s recession."

However, Finfacts has highlighted that half the value of services exports and related output results from the Double Irish Dutch Sandwich tax avoidance scheme - -  not economic activity in Ireland - - and in 2013 in exports the value was about €46bn  - with tax reform, this will evaporate in coming years.

The unit labour cost improvement has been artificially boosted during the recession years by this tax avoidance.

The biggest services companies are diverting 40% or more of their global revenues to Ireland and this also distorts PMI (purchasing managers' index) data.

SEE: The idiot/ eejit's guide to distorted Irish national economic data

It also remains to be seen what type of jobs will be created in coming years.

SEE: Q1 2011-Q2 2014: Irish employee jobs up 21,000; 130,000 part-timers seeking full-time work

On the Eurozone, the economists say: "Consensus forecasts for euro area GDP growth in 2014 have been revised down to 0.8% from 1% earlier in the year. France and Italy have disappointed expectations, while growth is more entrenched in Spain and Ireland. While domestic demand has remained weak, exports have also been dented by events in Ukraine and many countries overly exposed to Russian energy imports.

In particular, economic data for Italy have been consistently weak with GDP growth expected to stagnate at best this year. We discuss why a lack of significant structural reforms has stymied Italy’s recovery and pushed its unemployment rate to historic highs. This has been exacerbated by the fact that the Italian government has changed on four occasions since the crisis began in 2008. Another worry for the new government is financing the sizeable debt burden, the second-highest in the Eurozone at 134%, with little improvement in the country’s debt metrics expected in the coming years."

© Copyright 2011 by Finfacts.com

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