10 Oct 2018
Budget 2019: A little something for everyone
Ireland’s Minister for Finance, Paschal Donohoe, yesterday unveiled his second Budget. The backdrop coming into this annual exercise was very favourable. Ireland is poised to be the EU28’s fastest growing economy once again this year (we see GDP +7.0%).
The White Paper setting out estimated Receipts and Expenditure, released on the Friday before the Budget, showed that absent any policy changes, the country would run a surplus of €640m (equivalent to 0.2% of GDP) in 2019. While the economic case for an expansionary budget is flimsy (at best), realpolitik (the minority government is in a precarious position in the Irish parliament) made it an inevitable outturn. The EU’s fiscal regime limited the net fiscal space to €0.8bn, but in the event the government was able to unveil a €1.1bn package due to a number of revenue-raising measures. The government modestly reduced income taxes (through a mix of rate decreases and band changes) and provided a broad range of welfare increases, expanded childcare and healthcare supports and targeted additional funding on housing, mental health and the National Treatment Purchase Fund. To defray the cost of this, the government has removed the previous special low (9%) rate of VAT on hotels and restaurants while also increasing betting, cigarettes and diesel car taxes.
As a result of the Budget Day announcements, a General Government Balance of just -€75m is now guided for FY19, equivalent to 0.0% of projected nominal GDP. We currently forecast a surplus of 0.7% of GDP and while today’s news imply downside risks to this, we note that the Department has form for providing conservative guidance. One potential area for outperformance is that the projected growth in tax receipts of 5.2% is 100bps lower than the guided increase in nominal GDP – even allowing for the small tax cuts unveiled today this still feels a little light. Headline end-2019 General Government Debt to GDP is guided at 61.4%, well below the Q113 peak of 124.6%. In terms of the winners and losers from the Budget, the main beneficiaries are households, due to the income tax cuts and increased welfare supports. The hospitality and leisure sectors will be negatively impacted by the higher VAT rate, although it should be noted that underlying trading is strong, with STR data showing annual RevPAR growth of 9.2% in January-August 2018, so the sector should be able to easily absorb the effect of this increase. Assuming measures to spur housebuilding produce results, this will be good news for building products firms.
Irish Economy: Residential prices up, new car sales down
The latest data from the CSO show that residential prices increased once again in August, while last month saw a deceleration in new car sales. To start with residential property prices, these increased by 0.3% m/m in August, a 20th successive monthly increase. On an annual basis the rate of inflation slowed to 8.6%, the first single digit percentage increase in 16 months. However, this moderation in the annual rate of inflation is not a surprise (we had expected that the growth rate would slow to 8% by the end of 2018). The regional trends throw up some interesting results, with the annual rate of inflation slowing to 6.1% in Dublin, the slowest increase since April 2017, while outside of the capital prices were +11.4% y/y in August. This outturn is a function of Central Bank of Ireland mortgage rules limiting LTI multiples and LTV ratios on most new lending, with average asking prices in Dublin some 78% above the average for the rest of the country.
The latest increase in prices brings the cumulative rise in the national residential property price index since the 2013 trough to 81.1%, led by Dublin where prices have rebounded 94.5% from their low point. National prices are still 18.9% adrift of the 2007 peak, although it should be noted that there is a wide delta between this and the 30-40% peak-to-current declines we understand that the Irish high street banks assume in their provisioning models. Turning to the ‘Vehicles licensed for the first time’ data, these show a weak September for new car sales, -8.9% y/y in the month. Some of this weakness is likely to be have been down to nervousness about potential carbon tax changes in the Budget, as sales of petrol cars are +9% y/y while sales of diesel cars were -20% y/y. Year to date, new car sales are -4.7% y/y, but overall car sales are up slightly helped by a 9.2% y/y increase in imports of used (second hand) cars. In an encouraging sign where business confidence is concerned, we note that new goods vehicle sales are +5.6% y/y in the year to date, while imports of used goods vehicles were+6.4% y/y.
Irish Economy: Green light for Green Bond
The NTMA yesterday announced that it has mandated joint leads for a forthcoming inaugural Green Bond transaction. The bond, which will have a maturity of 18 March 2031, is expected to be launched and priced in the near future (subject to market conditions). The NTMA said last month that it was intending to issue the country’s first Green Bond, which followed government approval of the agency’s Irish Sovereign Green Bond Framework. The publication detailed how the proceeds from Green Bond issuance would be used to finance green projects and has been reviewed independently by ESG consultants Sustainalytics. To our knowledge, only France, Belgium and Poland within the EU28 have issued Green Bonds to date, so this move by the NTMA serves as a reminder of the agency’s appetite for using product innovation to help expand its investor base. In recent times the NTMA has issued Ireland’s first inflation linked bond and also the country’s first century bond.
Irish REITs: A slight decline in Dublin’s ‘Crane Count’
The latest Dublin Crane Count from the Irish Times in association with Savills, shows a 4% decrease in the number of cranes visible across Dublin in October. This month’s total of 89 cranes was 4 lower than September’s record high of 93. 55 cranes were visible on the south side of city, an increase of 4, as a result of ongoing construction in the docklands, Sandyford and Blackrock. There were 34 cranes visible on the north side, a decrease of 8 from September’s count. Although the Crane Count fell this month it is worth noting that the October count is nearly triple the number of cranes seen in February 2016 when the Irish Times first ran the series.
It never rains but it pours
After a week and a bit of upbeat Brexit news and rhetoric yesterday threw up another day of positive musings. Sterling was already on the front foot yesterday after a report from Bloomberg stated that “progress in Brexit talks, divorce terms could be settled by Monday” pushed it into fresh multi-week highs. Even more good news for UK PM this morning when overnight news reported that up to 30 Labour MPs are considering defying the party leadership and voting for Theresa May’s Brexit deal or perhaps abstaining, because of concerns about the consequences of leaving the EU without an agreement. Amidst reports that only a subset of the European Research Group might vote against the government, this latest report suggests the Parliamentary arithmetic is looking bit less threatening for PM May in terms of getting the “meaningful vote” passed in the British Parliament. Note that today, PM May faces her first Prime Minister’s questions since party conference whilst from Brussels we are set to hear from EU Chief Negotiator Michel Barnier. The benchmark EUR/GBP has slipped to mid/late June lows of just above the technically crucial £0.87 level on the back of this barrage of better Brexit news.
All eyes on UK GDP
Monthly GDP figures for August 2018 are due later this morning. We suspect these figures will show the UK economy still on track to see a pick up in the pace of growth recorded in Q2. Overall, we expect to see a GDP print of 0.2% mom, which would see output 0.6% up on a 3m/3m basis and 1.6% on levels in August 2017. Within this headline, we expect to see services output up 0.2% on the month, industrial output 0.3% higher, construction output 0.2% up, whilst our best guess is that agricultural output will be flat on the month. On the services front, we think the slight moderation in the monthly growth pace, to 0.2% from 0.3%, will come about after we see an easing in the ‘distribution, hotels and restaurants’ category after the solid 0.8% rise last month.