19 Dec 2018
Irish Economy Monitor Q4 2018
Today we release our final Irish Economy Monitor of 2018. The quarterly publication provides an overview of how the economy is performing and sets out our key forecasts. Happily, the latest data confirm that growth remains both strong and broad-based.
Irish Economy: Investec Irish Economy Monitor Q4 2018
Consumer spending, net exports and core investment are all showing good momentum. While the near-term outlook has become a little cloudier as a result of Brexit uncertainty, we judge that this momentum will deliver another year of progress in 2019. We nudge up our headline GDP forecast for 2018 by 20bps to +7.2% (growth was 7.4% y/y in 9M18), an outturn that will secure Ireland’s position as the EU28’s fastest growing economy, while retaining our previous 4.5% and 3.8% forecasts for each of the next two years.
The Irish consumer remains a key beneficiary of the economic strengthening. Employment increased by 3.0% y/y in Q3 while the total number of people at work is at a post-independence high of 2.3m. Unemployment has reduced to a 10-and-a-half year low of 5.3%. Helped by this tightening in the labour market, average weekly earnings are growing by 3.2% y/y, which combined with the 0.6% y/y headline increase in the CPI and ongoing modest income tax cuts, delivers a meaningful increase in real household disposable incomes. To this end, it is no surprise that retail sales, in cash terms, were +5.3% y/y in October. Household balance sheets have never been stronger, with net worth having risen by 76% since the low reached during the last recession to stand at €757bn now, which is 5% above the credit-fuelled Celtic Tiger peak. One thing to watch is consumer sentiment, which slumped to a 46-month low in October due to Brexit concerns, before recovering slightly last month.
On a less positive note, a yawning gap between demand and supply remains a key feature of the housing market, although lead indicators suggest that the ‘jaws’ should gradually close over the coming years. Housing output was +28% y/y in the year to date, but at an estimated 19,000 units this year it remains well adrift of the range of estimates of new household formation (30,000 – 50,000 per annum). Planning permissions for 29,495 units were, however, sanctioned in the 12 months to end-Q318, which supports our view that output should climb to 30,000 units in 2020.
Until the gap between supply and demand is closed, the path of least resistance for both prices (+8.4% y/y in October) and rents (+7.0% y/y in November) remains to the upside, although there has been some cooling in the growth rate in the former due to a combination of the Central Bank’s mortgage rules and higher new build activity. We see residential prices rising 5% next year. The outlook for the non-residential property market remains positive, supported by underlying economic growth and Brexit relocations. Perhaps the most visible sign of the upturn in the property market here is the 104 cranes over the Dublin skyline at the start of December, which compares to the 34 machines that were recorded when The Irish Times and Savills commenced their monthly census in February 2016.
Apart from rising housing output, core investment is being supported by increased business spend. New and used goods vehicle sales were +5.8% y/y and 5.4% y/y respectively in the year to date. The latest (Q318) business credit data from the Central Bank show the first annual increase in lending to Irish resident non-financial entities since Q209.
This has proven to be another good year for exports, with the year to date merchandise trade surplus, at €43.4bn, +18% y/y, helped by a 14% y/y improvement in exports. Services exports were +4.4% y/y in 9M18. The current account surplus has widened to 12.3% of GDP in 9M18, versus 7.2% over the same period in 2017.
Turning to the public finances, growth in tax revenues has gathered steam into the year-end, helped by accounting policy changes which have boosted corporate tax receipts and underlying growth. While noting that there is a realpolitik angle to fiscal policymaking at this time (specifically, a minority government and no shortage of populist voices on the opposition benches), we are sympathetic to the recent warnings from the Irish Fiscal Advisory Council about the risk to the public finances arising from possible adverse international developments. The NTMA raised €17.25bn from bond sales in 2018 at a weighted average cost of just 81bps (and maturity of more than 9 years), which is less than a third of the average interest rate on Ireland’s Sovereign debt. As more of the expensive crisis-era borrowings are replaced with cheaper new issuance, meaningful interest savings should continue to accrue to the Exchequer. In terms of other legacy matters, we retain our forecast of a €4.5bn lifetime return to the State from NAMA, which is €1bn above the agency’s own guidance.
So what are the risks at this time? As has been the case for some time, these are tilted towards the external environment, namely the fallout from monetary policy normalisation moves; rising protectionist sentiment; and the outcome of the Brexit negotiations. Domestically, housing and competitiveness remain our main areas of focus. Nevertheless, the broad nature of Ireland’s economic expansion and the strong deleveraging that took place over the past decade should help to counter any weakness. Returning to the minority government, the political landscape in Ireland has become more ‘Strong and Stable’ as a result of the extension to the confidence and supply deal between the administration and the largest opposition party, which pushes back a general election into 2020 at the earliest (we had previously predicted that a poll would take place in 2019, but no longer hold that view).
How the coming weeks play out at Westminster will likely prove pivotal for Irish economic growth in 2019, although as set out above the broad-based nature of the upturn here should deliver another year of progress.
Hibernia: Agrees unsecured refinancing
Hibernia REIT has today announced the refinancing of its secured rcf with: (i) A €320m unsecured rcf; and (ii) €75m of unsecured US private placement notes. The €320m unsecured facility has a five year term and a margin of 200bps over Euribor. The joint arrangers for this facility are Bank of Ireland, Wells Fargo, Barclays Bank Ireland and AIB. The previous secured facility (which had been the group’s sole debt facility) was repayable in November 2020 and had a margin of 205bps.
The private placement notes have an average maturity of 8.5 years and a weighted average coupon of 2.53%. These are being placed with a single institutional investor (which will close on 23 January although the transaction was priced on 26 October) in two tranches, €37.5m at 2.36% due in 2026 and €37.5m at 2.69% due in 2029. These refinancing moves extend the weighted average maturity of HBRN’s debt from 1.9 years to 5.7 years, providing good visibility on financing costs while also locking in cheap rates. The group currently has net debt of €210m. The switch from secured to unsecured also gives the group additional flexibility.
Dalata: Strong market data for November
The latest data from STR Global show another period of strong RevPAR growth in the Irish and Dublin hotel markets in November, reflecting the positive trading statement from Dalata yesterday which covered the period to end-November. The Dublin hotel market experienced 11.1% y/y RevPAR growth in November and 7.4% RevPAR growth YTD. Occupancy remains very strong and was 82.6% in November (+2.8pp) and 85.1% YTD, although most of the RevPAR growth is coming through higher rates. A similar story exists in the wider Ireland market with RevPAR +12.6% y/y in November and +8.7% YTD and Irish hotels continue to top the charts in Europe in terms of YTD occupancy. RevPAR in the UK was +2.2% in the month and +2.3% YTD. Yesterday, Dalata reported that its hotels grew RevPAR, on a like-for-like basis, in the year to end-November by 8.8% in Dublin, 5.3% in Regional Ireland and 3.2% in the UK.
Irish Banks: SME lending continues to decline
Central Bank of Ireland data released yesterday show that total outstanding SME credit to Irish resident firms was €24.3bn at the end Q318, an 8% annual decline in Q318 vs Q317, with ‘core’ SME credit (total ex property and financial intermediation) down 3.6% to €15.3bn. However, new lending continues to grow strongly, increasing by 22% in Q318 when compared with Q317. While we will continue to see strong new lending growth, this is only from a low base and the amortisation of legacy credit will continue to outstrip this until the outcome of Brexit becomes clearer cut. Within the SME sub sectors, we would note that only agriculture, transportation & storage, and business administration show any signs of net lending growth, with all of the other major sectors continuing to show a net contraction. We would note however that when larger non-SMEs are included in the net lending growth figures (ex-financial intermediation), we see the first (modest) signal of annual growth since Q209, suggesting larger companies are more optimistic of the future than SMEs.
Oil prices tumble 9% over 3 days
Oil continues its decline as slowing global growth haunts investors who are already worried about a supply glut. Oil prices have tumbled 9 percent over the past three days with fears over global growth persisting as Chinese President Xi Jinping showed little signs of backing down in a trade dispute with the US and the market braces for a Federal Reserve rate hike. Also, there are doubts over the effectiveness of output cuts pledged by the OPEC+ coalition at a time when American inventories are rising and Russia is pumping more.
Today’s Economic Calendar
09.30 UK CPI
09.30 UK PPI
15.00 US Existing Home Sales
19.00 US FOMC