Investec Irish Economy Monitor Q1 2018
26 Mar 2018
The latest economic data show a good start to 2018 for the Irish economy
The PMIs point to a sharp rate of expansion, albeit not quite at the blistering pace seen at the end of last year. Tax receipts are +3.0% y/y in the first two months of the year, with this growth rate expected to quicken as the year progresses. The unemployment rate continues to reduce, standing at a nine-and-a-half year low of 6.1% in February, -20bps in the year to date. Mechanically, were you to hold quarterly GDP flat on the Q417 outturn, this would imply that Ireland will grow by 5.5% in 2018 in GDP terms, keeping the country up towards the top of the EU growth charts. However, due to the volatile nature of Ireland’s quarterly national accounts, we elect to retain our previous 4.4% growth forecast for 2018 for now.
As alluded to above, the labour market remains a key source of good news for Ireland. Total employment rose 2.9% last year and is now just 1% below the peak reached during the Celtic Tiger period. The employment component of the PMIs suggest that labour market conditions should continue to tighten in 2018, which should apply further upward pressure on wages (these grew 2.5% y/y in Q417).
Rising employment and wage growth, allied to muted overall inflationary pressures (the CPI was +0.5% y/y in February) should deliver another good year for the retail sector in Ireland. Core (ex-auto) retail sales were +3.2% y/y and +5.7% y/y in value and volume terms respectively in January. Headline retail sales are still, however, being dampened by sterling pressure on the motor trades, with new car sales -2.9% y/y in the year to date while imports of second hand cars are +14.5% y/y in the same period. This follows the 10.5% y/y decline in new car sales and 31.9% y/y jump in imports of second hand cars recorded in 2017.
The most pressing issue in the country remains a chronic lack of housing, notwithstanding ongoing improvements in new build activity. Official completions were 19,271 units in 2017, +29% y/y, but this is still well adrift of even the low end of the range of estimates for new household formation in Ireland (30,000 – 50,000 per annum). We have nudged up our completions forecasts for 2018 (to 21,500 from 21,000) and 2019 (to 24,000 from 23,000) but the key message here remains that it will be a number of years before output can meet the flow of new demand, much less put a dent into the growing stock of unmet housing need. To this end, we continue to foresee strong house price growth (we retain our forecast for growth of 8.0% in 2018, while noting that the risks are to the upside). The narrative is, unsurprisingly, similar for the rental market, although rent caps in the key urban centres will see a slower build in rents.
Turning to trade, January saw record monthly goods exports of €12.3bn, helping to produce a new all-time high in the monthly trade surplus of €5.5bn. Elsewhere, the export component of the Services PMI has posted 15 successive months of expansion. Taken together, these point to another good year for exports in 2018. However, unhelpful currency moves (from an Irish perspective) lead us to adopt some conservatism in our forecasted export growth of 3.5%, which is about half the 6.9% rate recorded in 2017.
The public finances are an unsurprising beneficiary of the positive economic developments detailed above. We see an annual General Government surplus in 2018, the first that Ireland will have recorded since 2007. General Government debt stood at 72.1% of GDP in Q317, well below the H113 peak of 124.2%. Helped by State asset sales, it could be sub-60% by the end of this decade. The State is not the only player in the economy that has radically improved its balance sheet. In cash terms Irish household debt (€142bn in Q317) is at its lowest level since Q405, while the ratio of household debt to disposable income has fallen to 140.2%, well below the peak of 215.4% recorded in Q409. As President Kennedy said in 1962, “the time to repair the roof is when the sun is shining”.
While the sun is shining on Ireland, there are a number of risks at this juncture. The UK’s Brexit negotiations are a key focus for Ireland. While we have reduced our exposure to the UK over the years (in 1926 it was the destination for a remarkable 96.7% of Irish goods exports, versus 13.4% in 2017), it remains a very important trading partner. In this regard, the outcome to Phase I of the negotiations late last year brought welcome reassurance, particularly in terms of trade on the Island of Ireland and between Ireland and Britain (and beyond), although some of the detail remains to be worked out. Furthermore, the 21 month transition period after March 2019 provides some welcome breathing space (and we suspect that it might be extended). The gradual normalisation of monetary policy by the world’s leading Central Banks may have implications for Ireland. More than 40% of Irish mortgages are trackers with an average 100bps spread over the ECB base rate, but while those borrowers are likely to see modest increases in interest costs over the coming years, other borrowers could see the cost of their mortgages come down given where SVR and fixed rates are here relative to elsewhere in the eurozone. A greater concern for us is any adverse developments in the currency markets arising from the Central Bank moves, given Ireland’s unusually high degree of openness to international trade. Political developments in the US and the eurozone also merit close monitoring in the coming months.
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