It claimed suggestions that the country’s economy is operating at full capacity represents an “unduly pessimistic” view of growth prospects.
Institutions such as the European Commission argue that Ireland has one of the smallest so-called output gaps in Europe. An output gap is the difference between the actual output of an economy, and the output it could achieve when at its most efficient or at full capacity.
The Commission, by arguing that the output gap is almost closed, is stating that the budget deficit is almost entirely structural, and that the deficit will not be improved by growth in the economy alone.
“That is, the Government cannot rely on the economic cycle to naturally close a substantial portion of the remaining budget deficit and should press on with fiscal consolidation,” Davy said it in its latest economic monthly bulletin.
“Our view is that the output gap is probably well in excess of 1pc of GDP and budgetary out-turns could still surprise favourably.”
Davy said it believes that Ireland’s output gap is far larger than 1pc and that the economy may “bounce back sharply in the coming years”.
It added it expects to upgrade its forecasts for growth this year towards 5pc.
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