14 Sep 2018

Irish Economy: A strong GDP print in Q2

Quarterly National Accounts data show that the economy expanded by 2.5% in GDP terms in Q2 2018. On an annual basis, GDP was +9.0%. Irish national accounts data always carry a health warning due to the distortions produced by the multinational sector, but to be fair there is evidence in these data of buoyant conditions in the ‘real’ economy.

On an annual basis, personal consumption was +4.4%; government expenditures +4.2%; investment -32.0%; exports +11.3%; and imports -6.0%. The bumper personal consumption figure reflects strong employment growth (+3.4% y/y in Q2) and rising real incomes (see CPI comment below). Government expenditures were a little stronger than we would have imagined, but we wouldn’t necessarily expect this to moderate in the near term, as the 12.4% y/y rise in nominal GDP (the denominator for debt and deficit calculations) in H118 likely ups the ‘fiscal space’ available to Minister Donohoe in next month’s Budget – last October’s Department of Finance calculations assumed a 4.4% increase in nominal GDP in 2018. 
 

The fall-off in headline investment reflects distortions from the multinationals, with sharp declines in purchases of aircraft and intangibles recorded, while underlying investment is healthy – dwellings +37.9% y/y, other building & construction +10.0% y/y, core machinery & equipment purchases +37.7% y/y. On the export side, goods exports were +17.5% y/y, with the strong growth here flagged by monthly merchandise trade data, while services exports rose at a solid 4.0% y/y. The slide in headline investment (particularly intangibles) weighed on headline imports, although we note that goods imports were +4.3% y/y, more in-line with what you’d expect from a fast-growing economy. BoP data released alongside the national accounts show a current account surplus of €19.7bn in H118, which suggests that the full-year outturn could exceed last year’s €24.9bn surplus (equivalent to 8.5% of GDP).
 

Irish Economy: CPI at 0.7% in August
 

Inflation data released by the CSO yesterday show that prices rose 0.3% on the month in August. On an annual basis, the CPI was +0.7% versus the 0.8% print in July. In terms of the annual change, the narrative is effectively one of upward pressure on the inflation rate from domestic sources (rents, RMI, higher ‘eating out’ expenses) being partly offset by imported deflation and lower insurance prices, with the latter reflecting a change in the claims environment. Three sub-indices that we closely monitor are Private Rents, Accommodation and Insurance. Private Rents were +1.0% m/m and 6.2% above year-earlier levels, due to the continued mismatch between supply and demand. Accommodation services costs were +1.5% in the month but 1.1% below year-earlier levels, a surprising outturn given strong tourism data and the domestic economic strengthening. Insurance rates were flat on the month but -5.2% y/y, led by lower motor insurance costs due to the aforementioned industry developments. The headline rate of inflation has been persistently sub-1% y/y for five and a half years, helping to underpin a meaningful uplift in aggregate real earnings (nominal wage inflation was +3.3% y/y in Q218).
 

Irish Economy: NTMA raises another €1bn
 

Yesterday’s NTMA auction raised €1bn from a tap of the 0.9% Treasury Bond 2028. The auction attracted €2,395m (2.4x covered) of demand, helping the new bonds to price at a yield of 88.8bps. As a result of this successful auction, the NTMA has now raised €13.5bn in the year to date, which is just below the low end of the 2018 target funding range of €14-18bn from bond sales. It is helpful to see the agency raise more long-term debt at an implied negative real yield. With the public finances about to transition into surplus the proceeds will help to refinance expensive crisis-era borrowings, trimming the State’s interest bill. 
 

No surprises at ECB
 

As expected, the ECB’s Governing Council (GC) kept its key policy rates steady yesterday. The deposit rate remained at -0.40%, the main refinancing rate at 0.00% and the marginal lending facility rate at +0.25%. Additionally the GC tweaked the language of its accompanying statement to confirm that it would indeed halve the monthly pace of QE purchases to €15bn from October, while it still anticipated that it would cease them all together at the end of the year. In its assessment of the economy, it continued to judge that the Euro area expansion remained broad-based. However, it acknowledged that risks relating to protectionism, emerging market vulnerabilities and financial market volatility had recently gained “more prominence”. Nevertheless, the risks to the outlook were still believed to be balanced by all those on the GC. In the subsequent press conference, President Mario Draghi explained that this was due to the offsetting impact of rising upside risks. These included “less neutral” fiscal policy stances among some Euro area economies, as well as the tightening labour market and growing evidence that wage growth is picking up. Overall, the ECB’s September meeting offered few clues on its plans for the policy rates. The accompanying statement simply reiterated that the GC expects them to remain unchanged “through the summer of 2019”.

UK Monetary Policy Committee – On Hold

The UK Monetary Policy Committee held the Bank rate at 0.75% at this month’s meeting, as widely expected. New member Jonathan Haskel joined his other eight colleagues in a 9-0 vote. Voting to keep the stock of purchased gilts and corporate bonds unchanged was also unanimous. This was always going to be a ‘wait and see’ meeting as the committee assessed the path of the economy and its reaction to last month’s 25bp increase in rates. The minutes to the meeting stated that August’s projections remained broadly on track. Events over the past month or so have not budged the MPC’s assessment that the economy will expand at a pace a touch above its sustainable rate, resulting in a small margin of excess demand over the medium-term. Its guidance last month was that one 25bp Bank rate increase per annum would be required to rein in the resulting inflation pressures over the next two to three years.
 

Carney compares No-deal Brexit to 2008 crash
 

The governor of the Bank of England Mark Carney has warned the UK Government that the potential consequences of a no-deal Brexit, comparing it with the fallout from the 2008 financial crash. During a special cabinet meeting yesterday to discuss plans in the event for the UK leaving the block without a deal with the EU, Mark Carney told Theresa May and her senior ministers of the potentially catastrophic economic consequences of leaving on poor terms.
 

According to cabinet sources Mr. Carney painted bleak economic picture of unemployment reaching double figures in percentage terms, house prices falling by 25-35% over three years, and transport links with the EU stalling.
 

11.00 UK BoE Gov Carney speaks

13.30 US Core Retail Sales

15.00 US Michigan Consumer Sentiment