Davy Stockbrokers has cut its forecast for the Irish economy due to the risk of a more severe global slowdown and poor consumer sentiment at home.

Davy says that GDP will grow by just 1.1% in 2011, down from its earlier forecast of 1.6%.  It has also reduced its forecast for next year to 1.7% from 2.4%. Davy says that growth remains split between the “buoyant” export sector and “stagnating” domestic demand.

Since its last forecast, Davy said that economic indicators in Ireland's main trading partners have deteriorated, and one of the main reasons for the cut in its economic outlook is the weaker demand for Irish exports.

It said that while a severe prolonged global slowdown would be very unwelcome for Ireland, Irish exports are very specialized in niche sectors such as computer services and pharmaceuticals.

“Irish exports may be able to weather the storm better than global trade if a double dip in the world economy emerges,” Monday’s report said.

Back home, Davy said that consumers have increased their level of saving and reduced their spending levels due to cuts in people's income as a result of higher inflation and the tax increases from the last budget.

While consumer confidence has improved a little since the beginning of the year, Davy said it will likely remain weak due to the worsening European debt crisis, falls in property prices, the high unemployment rate and uncertain economic prospects.

The stockbrokers also said that a very slow recovery in employment growth means there is very little improvement in the unemployment rate. It predicts the rate will fall to 13.9% in 2010 from 14.3% this year.