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Monday 5 December 2016

Davy revises up its growth forecast for next two years, but warns of Brexit danger

Economist Conall Mac Coille
Economist Conall Mac Coille

Davy stockbrokers has revised up its growth prospects for the economy this year and next, but warned the possibility of a British exit from the European Union is the top threat to the figures.

The Dublin-based firm had predicted growth this year of 4pc and 3.7pc in 2017. But now it expects GDP to increase by 6pc in 2016 and 4pc next year.

Davy economist Conall Mac Coille said the decision to upgrade was taken due to the exceptionally strong momentum in the economy that has been maintained into early this year.

"However, the possibility of Brexit, coupled with political uncertainty in Ireland, poses a threat," Mr Mac Coille said.

He added that the revised forecasts reflected the 7.8pc growth last year.

"This momentum means that even if GDP flat-lined through 2016, the economy would still expand by 3.3pc in the calendar year," Mr Mac Coille added.

"However, retail sales data, PMI surveys and unemployment benefit claimants have all continued to point to rapid growth in Q1 2016."

Davy said the Irish economy was still in "catch-up mode", with consumers and domestic companies only recently joining the recovery.

Boost

Retail sales are still below their peak. The domestic recovery, Mr Mac Coille said, is being sustained by tax cuts and falling oil prices, helping boost the spending power of households.

"Should the UK vote in favour of Brexit on June 23, the two-year exit period under Article 50 of the Lisbon Treaty will ensure no immediate change to trade arrangements," Mr Mac Coille said.

"However, uncertainty could cause companies to put off investment plans.

"Exporters could also be faced with a sharp sterling depreciation, close to parity with the euro."

He warned the agri-food sector could be particularly hit, as the UK accounts for about 50pc of agricultural exports.

Meanwhile, the International Monetary Fund has warned that global financial risks have heightened because of higher economic risks, falling commodity prices and concern about the slowdown in China's economy.

The IMF said in its latest Global Financial Stability Report that financial system risks have risen since the last report in October and market turmoil could easily recur and intensify if no action is taken to clean up bank balance sheets.

"If the growth and inflation outlooks degrade further, the risk of a loss of confidence would rise. In such circumstances, recurrent bouts of financial volatility could interact with balance sheet vulnerabilities," the IMF said in the report.

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