Monday 11 December 2017

Growth forecast hiked to 5pc as jobless rate 'dropping like a stone'

Davy expects consumer spending to grow by 3.4pc in 2017 and employment to grow by 2.8pc. Stock picture
Davy expects consumer spending to grow by 3.4pc in 2017 and employment to grow by 2.8pc. Stock picture
Donal O'Donovan

Donal O'Donovan

The country's biggest stockbroker is now predicting 5pc growth this year, with the economy tipped to expand on last year's better-than-expected levels.

It comes with a warning that a bad Brexit deal could set the economy here off course, leaving the Exchequer vulnerable to any increased spending commitments.

Davy Stockbrokers thinks house price growth will return to double digits this year - at 10pc - as wage growth and looser lending rules combine with the ongoing lack of supply.

Davy's revised growth forecast is for the economy to expand 5pc in 2017 - up from a previous forecast last January for 3.7pc growth. Davy's sees growth of 3.8pc next year.

Unemployment is set to fall to 5.3pc in 2018 - around a third of the level recorded in 2012. "Unemployment is dropping like a stone," Davy chief economist Conall MacCoille said.

Read More: We can't afford to loosen purse strings until our massive debt starts to come down

The Department of Finance last month hiked its 2017 growth forecast to 4.3pc, citing stronger momentum in the back end of last year, and the failure of the Brexit vote to send the economy here or in the UK off course. Growth had been widely predicted to slow this year - including because of the effects of last June's Brexit vote.

However, Mr MacCoille said short-term indicators in the first part of this year, including manufacturing and services sector data and job numbers point to rapid growth. The export-led growth that kick-started the recovery was now a smaller driver of growth, but the domestic economy was set to continue expanding, Mr MacCoille said.

Davy expects consumer spending to grow by 3.4pc in 2017 and employment to grow by 2.8pc. Export growth is predicted to pick up from 2.4pc in 2016 to 4.5pc in 2017 and 4.4pc in 2018.

The figures point to the Irish economy growing at the fastest pace in the Euro Area this year, but big risks remain.

Mr MacCoille said the latest forecasts can't account for the impact of potential Brexit effects, which remain unknown and are most likely to be felt from 2019.

Meanwhile, Davy anticipates a damaging hard Brexit will be avoided. Its base case is for a transitional Brexit deal agreed by both sides to avoid the worst case scenario of a hard Brexit and WTO tariffs.

This year's better economy will boost the so-called fiscal space or spending potential available for Budget 2018 in October, but Mr MacCoille said the risks to the economy should put a damper on tax cuts or spending increases.

Davy expects a balanced Budget next year. "The reality is it would be extremely foolish to commit to large tax cuts or spending increases," he said.

Increases in public pay, currently under negotiations, should be in line with those in the private sector, Mr MacCoille said. Government pay increases should also be conditional on economic performance, he said, a policy that would see pay gains given up again if the economy reversed.

"Higher growth doesn't change the longer-term sustainability issues around public sector pay and pensions," he said.

"A better outlook for the next two years is not going to solve a 40-year problem."

The better forecast for Irish growth is in keeping with the improving trend in the eurozone.

However, one of Europe's top investors warned yesterday that a crash could be just around the corner, and it would hit hard because the economy was pumped up with cheap central bank money.

Thomas von Koch, who runs EQT Partners in Stockholm, says markets look like they're headed for a sizable shock.

After it correctly predicted Brexit and Donald Trump's election, EQT was shifting money to low-risk areas such as broadband infrastructure and healthcare services, he said.

"There's a tornado warning and we're in the prairies of the Midwest. We just need to prepare for when it strikes us," he added.

Irish Independent

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