Davy Stockbrokers has raised its 2013 forecast for the Irish economy following “surprisingly strong” investment spending.

The company believes Irish gross domestic product (GDP) will grow by 1.3 per cent this year, up from its forecast of 0.9 per cent last October.

Third-quarter data from last year showed investment spending, led by capital expenditure on machinery, was up 10 per cent on the year, the strongest expansion since the first quarter of 2007.

The stockbroking firm predicts employment will grow by 0.6 per cent this year, the first year of expansion since 2007, reflecting accelerating private sector employment growth but also a reduction in the pace of public sector job cuts.

However, chief economist Conall Mac Coille said monthly data on Ireland’s export performance had painted a worrying picture.

“The most worrying development since our last forecast has been a severe fall in goods exports through Q4 2012. Goods exports declined an enormous 7.5 per cent in the final quarter of the year, driven by a 12.6 per cent fall in pharmaceutical exports.”

He said a 3.8 per cent contraction in industrial production in the final quarter of 2012 was also led by the fall in pharmaceutical sector output, adding that a more severe slowdown in exports cannot be ruled out.

“The ultimate impact of the pharmaceutical patent cliff remains uncertain.”