Goodbody Stockbrokers has revised its economic outlook, predicting a less severe contraction in the economy in 2010 and a more optimistic growth figure for 2011.
The quarterly economic update said analysts were expecting Gross Domestic Product (GDP) to contract 1.1 per cent in 2010, compred with earlier estimates of a 3.7 per cent contraction.
Growth in the economy expected in the second half of 2010 will be led by improving exports, the firm said, and will result in a growth figure of 2.4 per cent in 2011. Previous estimates put growth at 1.2 per cent for the year.
Chief economist Dermot O'Leary said high levels of debt in the private sector were of greater concern in the medium term than public sector debt.
"We believe private sector debt levels will increase to 224 per cent of GDP in 2009, and are unlikely to fall below 200 per cent until 2012 (similar to current levels in the UK and US)," he said.
"Given that Ireland is one of the most indebted economies in the developed world, we have benefited most from the collapse in interest rates, which we have quantified at around 5 per cent of GNP. However, this benefit will not be repeated and will instead act as a drag on businesses and consumers going into 2011 in particular as the impact of interest rate rises is felt."
The firm said it had repeated an analysis of household debt that was originally carried out in 2005. The study found that although household debt levels increased further to peak at 175 per cent of disposable income, Irish households are better able to sustain higher debt levels as a result of a younger population and low interest rates.
"However, high debt levels increase the sensitivity of Irish households and the economy overall to interest rate changes, both on the way up and they way down," Mr O'Leary said.
Household asset values, estimated at a total of €824 billion at the end of 2006, are expected to amount to €654 billion by next year, close to levels seen in 2004.
"This can be very much attributed to property, giving Irish households' dependence on this source of wealth," said Mr O'Leary.
"By the end of 2010, we estimate the value of the housing stock will stand at €342 billion, a drop of a third from the peak."
The economic update also poured cold water on hopes of reachign Government targets of reducing the budget deficit by 2013.
"The budget deficit is likely to remain high in the coming years and we do not believe that the Government will reach its target of hitting the 3 per cent of GDP deficit by 2013," said Mr O'Leary.
However, there was some confidence about the economic outlook. "Government bond yields are down, policies have been put in place for resolving the banking issue, a budget consolidation plan has been put in place, funding is complete for this year and has begun for 2010 and recent rhetoric suggest that more focus is going to be placed on spending in the coming Budget rather than further damaging tax increases," said Mr O'Leary.
"Risks remain but the outlook has brightened considerably."
