CBI revises higher its growth forecasts but warns on Brexit

12 October 2018

The Central Bank of Ireland (CBI) has today released its final quarterly bulletin of the year. It has upgraded its growth forecasts for both this year and next with GDP now expected to expand by 6.7% in 2018 and by 4.8% in 2019, increases of 200bps and 50bps respectively from its previous estimates.

The CBI’s growth expectations now match our own for next year but remain 100bps lower than our forecast for 7.7% GDP growth this year. For 2020, the CBI’s opening forecast for GDP growth is 3.7%, 10bps behind our expectation. In its accompanying commentary, the CBI notes that the growth of domestic economic activity gathered pace in H1 2018 and, significantly, this growth is being fuelled by higher employment and strengthening household balance sheets rather than unsustainable increases in domestic credit or net financial inflows.
 
Against this backdrop, underlying domestic demand is projected to expand by 5.6% this year and by 4.2% in 2019. While capacity in the economy “is set to tighten” as the economy moves towards full employment, “some extra capacity is possible through further inward migration and increased participation in the labour market”. The CBI also highlights the downside risks which the economy face, including the risk of overheating as full employment comes into view and, externally, downgrades to global growth prospects and the potential negative impact from Brexit. On this point, the CBI analyses the implications of the UK Government’s Brexit White Paper (i.e. the “Chequers” proposals) on the Irish economy. Overall, this analysis suggests that in the event of a Brexit agreement implied by the White Paper proposals, Irish GDP would be around 1.7% lower in the long run compared to a soft-Brexit baseline. This compares favourably (or less negatively) with the estimated fall of 2.9% in a scenario which sees the UK default to WTO trading rules. Turning briefly to housing output, the CBI suggests that 19,000 new units will be completed this year, rising to 24,000 in 2019 and 28,500 in 2020 – moderately lower than our forecast for housing output of 30,000 units in 2020.
 
Irish Economy: CPI up to +0.9% y/y
 

The latest CPI release from the CPI show that prices on average were +0.9% y/y in September. This is the highest annual rate of inflation in 17 months. The narrative is one of higher costs relating to housing, socialising and getting from A to B being partly diluted by imported deflation arising from the weak pound. Housing costs were +6.3% y/y in September and within that there was double-digit inflation in utility prices, 4.1% y/y inflation in rents (Private Rents were +0.5% m/m and +6.1% y/y) and 2.7% annual inflation in RMI costs. Restaurant and Hotel prices were, on average +2.2% y/y in September, although within that it should be noted that Accommodation Services rates were -0.4% y/y. Transport costs were +2.2% y/y, led by a 10.4% y/y increase in fuel prices. We have long suspected that the weak pound is pushing down on prices in some areas and suspect that this explains the moves in Food prices (-2.2% y/y) and Furnishings (-3.7% y/y). Elsewhere within the release we note that Insurance rates were -0.2% m/m and -5.4% y/y, reflecting developments in the claims environment.
 
Dollar slides on weaker US inflation
 

US inflation figures for September came in softer than expected yesterday with a 0.1% rise in headline and core inflation (consensus +0.2% for both), such that the headline rate of inflation came down from 2.7% to 2.3% and core inflation held steady at 2.2%. Accompanied by a slight rise in jobless claims to 214k from 207k last week (consensus 207k), the figures are clearly not unhelpful for sentiment today, amidst the heightened concerns over further Fed rate rises and over higher Treasury yields of late, which have underpinned the sell-off of the past 24 hours. Following the US data, S&P futures have recovered earlier lost ground (to +0.1%), Treasury yields have fallen over 2bps to 3.17% and the USD is weaker with the benchmark EUR/USD rate back up over the $1.16 level.
 
UK ‘war cabinet’ meets ahead of UK summit
 

The PM’s ‘war cabinet’ met yesterday with a number of stories (officially denied) suggesting that the UK and the EU are close to a deal. Brexiteers are concerned that the backstop on Northern Ireland includes an open ended commitment for the whole of the UK to remain in a customs union with the EU until a longer-term, workable solution is available. It is still believed that the agreement on the future relationship with the EU will be settled by a loosely worded political declaration where the specifics of the arrangements will be settled after 29 March i.e. there will be a certain degree of can kicking. However no-one knows for sure, as the EU side of the negotiations is currently in ‘tunnel’ mode where officials are effectively in lockdown ahead of a sherpas (i.e. lower level) meeting early next week and the EU Summit itself which starts on Wednesday evening. Sterling is slightly higher this morning with EUR/GBP hovering in/around the 0.8750 level.
 
Thought of the day

Asian & European equities stabilise after another bumpy US session
 

There’s a lot of comforting green numbers across the board this morning as we turn the screens on. Following yesterday’s torrid European and then US trading sessions where most if not all indices closed down anywhere between -1.25% and -2% and the VIX volatility index spiked to eight month highs of close to 29, it is a welcome relief to see Asian markets closing and European markets opening in positive territory. US futures are also pointing to a positive open. Yesterday’s very welcome and weaker than forecast US inflation print seems to have gone some way in turning the negative risk sentiment. President Trump was still pointing fingers of blame at the Fed, saying that the Fed “is out of control” from a rate hiking perspective but Fed Chair, Jerome Powell’s job appears to be still safe as Mr. Trump promised he was “not going to fire him”.