Investec Irish Economy Monitor Q4 2017

02 Jan 2018

Recent data releases confirm that Irish economic growth gathered steam during 2017. The Investec Manufacturing PMI improved to a two year high in June, then strengthened to its highest since December 1999 in the latest (November) release.

Recent data releases confirm that Irish economic growth gathered steam during 2017. The Investec Manufacturing PMI improved to a two year high in June, then strengthened to its highest since December 1999 in the latest (November) release. Tax revenues were running 2.4% behind target at the end of Q1, but November’s Exchequer Returns show that underperformance has given way to outperformance, with year to date receipts now 0.4% ahead of expectations. Blockbuster national accounts data for Q317 (GDP +10.5% y/y) see us upgrade our FY17 GDP forecast to +7.0% from the previous +4.8%. Granted, specific factors relating to the multinationals do slightly flatter this headline growth rate. However, even using the modified total domestic demand figure to ascertain a better read on the health of the underlying Irish economy still reveals a very strong performance, with growth here running at 4.9% y/y in the first nine months of the year. Lead indicators show that the economy is going to exit 2017 with a strong tailwind behind it, suggesting upside risk to our (unchanged) GDP forecast of +4.4% for 2018. This could see Ireland top the EU’s “growth charts” for a fifth successive year.

The labour market remains a key source of good news for Ireland. The unemployment rate fell to a nine-and-a-half year low of 6.1% in November and extrapolating from this suggests that total employment is now 2.13m, back to within 1.6% of the Celtic Tiger era peak. As labour market conditions have tightened, this has placed some modest upward pressure on wages, with average weekly earnings hitting an all-time high of €721.47 in Q117, +4.5% from the trough that was hit during the last recession.

Employment and earnings growth have fed into stronger retail sales. On a headline basis these were +4.2% y/y in Q317 in volume terms but the rise in the value of sales was somewhat slower at +1.7% y/y. The weak pound has been a headwind for Irish retailers this year. On an overall basis we suspect that the weak pound has pushed down on consumer prices (contributing to the divergence between sales growth in volume and value terms), while the segment of the retail market that has been most impacted is the motor trades, where new car sales fell by a tenth this year as imports of used cars (mainly from the UK) jumped by more than a third.

In the housing sector the large mismatch between supply and demand remains the most pressing issue. While 2017’s completions (as measured by ESB connections) look like they will come in around our 19,000 forecast (+28% y/y), this is well below even the low end of the range (30,000 – 50,000) of forecasts for annual new household formation. Lead indicators such as planning permissions and the housing component of the Ulster Bank Construction PMI suggest that it will be some years before output rises to meet the ‘flow’ of new demand, much less put a dent in the existing large ‘stock’ of unmet housing need. National house prices rose 11.1% in the first 10 months of 2017 alone and we see only a slight moderation in the rate of growth from here, as we retain our 8% house price inflation forecast for 2018.

Turning to trade, while the national accounts measure of net exports paints a buoyant picture, other data are more nuanced. The monthly merchandise trade data from the CSO show nominal goods exports were +2% y/y in the first 10 months of the year, contributing to only a marginal increase in the trade surplus, with the sluggish growth rates here likely down to unhelpful FX moves.

As alluded to above, the public finances have recovered after a soft start to 2017. By the end of November the general government balance was running at +€0.4bn, well ahead of the Department of Finance’s projection of a €1.2bn deficit. We see the State moving into surplus on a full-year basis in 2018, some two years ahead of the Department’s own forecast. We also note positive developments in the national debt, with €5.5bn of crisis-era debt refinanced at cheaper rates this year, saving €150m in interest payments over the remaining life of the loans. The Sovereign was also upgraded during 2017 by Fitch (to A+/stable), Moody’s (to A2/stable) and R&I (to A).

What are the key risks for Ireland at this juncture? These are mainly external, such as how the Brexit talks progress (although the outcome of ‘Phase I’ of the discussions was particularly encouraging for Irish interests), policy surprises in the US and the fallout from the gradual normalisation of monetary policy across the world’s major economies. Eurozone political risk is notably tamer compared to this time last year, with the main focus on developments in Catalonia and Italy’s election in H1 of next year. In recent weeks the risk of a snap election in Ireland was only staved off at the last minute. While this raises doubt about the longevity of Ireland’s minority government it is hard to see any significant changes arising from fresh elections given that opinion polls show a significant swing to the centrist parties (including the government party) who have only minor policy differences between them.

For more information on the above, please click here to see the Q417 Irish Economy Monitor.