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Coalition's €15bn plan is already out of date, says Davy

Analysts slash key indicators but are upbeat on bond rates

Published 27/10/2010 | 05:00

THE Government's €15bn Budget target could already be out of date -- based on gloomy new forecasts from Davy Research.

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However, analysts at the stockbroker do expect interest rates on Irish bonds to fall next year, as the country moves into surplus in its dealings with the rest of the world.

Davy has slashed its forecasts for all the main elements of the economy since its previous forecast. It now expects private consumption to fall again next year; down 0.8pc, instead of the previous forecast of a 2.7pc increase.

Investment and government consumption will also hamper growth, with public purchases of goods and services falling by 4.7pc, compared with a previously forecast 2pc drop. Even export growth will be lower -- at 4.9pc instead of the earlier 6pc.

The 2011 forecasts are gloomier than those from the ESRI on which the Government is basing its budgetary plans. The ESRI expected GNP growth of 2pc and 2.25pc in GDP.

Davy says growth will return to the economy in 2011, with national income (GNP) up 1.2pc. But this will not be enough to restore this year's expected 1.5pc contraction.

Total output (GDP), which includes multinational profits, is expected to rise 1.9pc in 2011, after a marginal increase this year.

Davy economist Aidan Corcoran says government cutbacks will weigh on consumer spending power and sentiment but the impact should not be exaggerated.

"The end of nominal wage declines, combined with a gradual bottoming in employment, will allow consumption to begin a substantive recovery in the second half of 2011," he says.

"The effect on growth of fiscal cuts will be negative, but the magnitude should not be overstated.

"Some part of this negative effect will have been seen already in this year's declining real consumption. The high savings ratio shows a private sector keen to pay down excessive debt, which will provide upside to consumption expenditure when employment prospects improve.

"Aggressive fiscal consolidation will limit growth in 2011 but will enable a stronger recovery thereafter," the report says.

Next year should see a return to surplus in the country's current balance of payments with the rest of the world. Because this means the public and private sectors together are no longer borrowing from abroad, Ireland's ability to service national debt will improve, Davy says.

"This will contribute to a likely fall in yields on new debt issued in 2011 relative to recent high levels.

"The correction has been dramatic, and we believe a surging trade surplus will fully offset negative net factor payments in 2011, despite still high government borrowing costs adding to these payments," it says.

Irish Independent

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