Economic outlook to weaken in 2005 - report

The economy will experience a better "quality" of growth this year but will slow down again in 2005, according to a new commentary from economists at Davy Stockbrokers.

Davy also predicts that the euro will weaken from its current levels around $1.20 against the dollar to $1.10 before the end of this year, amid the policy changes that should follow November's US presidential election.

The euro is also set to lose ground against sterling, according to the analysis, which sees the euro falling from about 65p to 61p before the end of December.

The research includes what Davy calls a "technical" downgrade on the Irish economy for 2004, with the broker's forecast for Gross National Product (GNP) this year reduced from 3.8 per cent to 3.3 per cent.

GNP, which excludes the profits of foreign-owned businesses operating in the Republic, is seen by some economists as the most accurate measure of the economy's performance.

The cut is based primarily on the high level of stocks that was carried into 2004 from the end of last year. This "very rapid build-up in stocks" in the final months of 2003 was higher than most commentators had anticipated and naturally implies less production in 2004.

Davy points out, however, that the projected GNP growth of 3.4 per cent in 2004, while being similar to last year's 3.3 per cent, will "feel" significantly better as consumer spending, investment and exports all expand at the same time.

The economic outlook is less positive for 2005, however, with Davy expecting GNP growth to fall back to 2.6 per cent. This is in sharp contrast to the expectations of some other forecasters, with the Economic and Social Research Institute, for example, predicting GNP to grow by 4.4 per cent next year.

The main factor behind the differential is Davy's belief that the pace of global growth will ease later this year and into 2005. The broker is presuming that US growth will fall back after the current round of tax rebates finishes this summer, with the aftermath of the presidential election also to inhibit performance.

Back at home, Davy says higher inflation and a possible "adjustment" in the housing market could also act as restraints on the economy in 2005.

The broker's view on euro weakness, which contrasts with most other commentators, stems from an expectation that the "tough fiscal decisions" likely to emerge in the US after November's election will support an appreciating dollar. Currency markets would welcome measures designed to tackle the US's burgeoning deficits, says Davy.