14 Dec 2018
Ireland's economic headline growth tracking slightly ahead of Investec forecasts
National accounts data released by Ireland's CSO show that the economy grew by 0.9% in headline GDP terms in Q318. On an annual basis, GDP was +4.9%, helping to produce a 9M18 growth rate of 7.4% y/y.
We currently forecast headline GDP growth of 7.0% for FY18 but on the strength of these data will likely upgrade this by 10 or 20bps. The expenditure side of the accounts shows that in Q3 personal consumption was +2.9% y/y; government expenditure +6.1% y/y; investment +43.4% y/y; exports +9.4% y/y; and imports were +16.4% y/y.
Investment growth is flattered by multinational sector distortions, but the underlying data show that the 'real economy' is investing heavily - investment in dwellings is +26.1% y/y, broadly tracking housing completions, RMI is +7.5% y/y (this is in line with industry commentary) and 'Other Building & Construction' investment is +17.2% y/y (again not a surprise given commercial property indicators, or more prosaically the number of cranes over Dublin and, to less of an extent, Cork).
Investment in Machinery and Equipment was close to double year-earlier levels, skewed by a 215% rise in aircraft purchases by leasing companies (these also appear in the import column, so largely net out where the headline GDP growth figure is concerned). Intangibles (mostly software licenses) imports rose by a third y/y. But even paring the growth rate in investment to allow for these multinational distortions still shows solid core capex. Indeed, the 'Modified Gross Domestic Fixed Capital Formation' measure, which strips out the multinationals, recorded volume growth of 5.6% y/y in Q3. The 9.4% y/y rise in exports was more or less evenly split between goods (+8.6% y/y) and services (+10.5% y/y).
The goods export performance was well flagged by monthly CSO merchandise trade data, while the Services performance was hinted at by PMI data. As mentioned, the double digit growth rate in imports is flattered by multinational investment, but it also reflects a buoyant real economy. Balance of Payments data released alongside the National Accounts show that the current account balance in 9M18 is equivalent to a remarkable 12.3% of GDP, up from 7.2% in the same period of last year. Modified Final Domestic Demand, a superior measure of underlying growth than GDP, shows an increase of 4.1% y/y in Q318, with the year to date growth now at 5.1% y/y.
Irish Economy: Inflation eases in November
CPI data for November show that inflation fell 30bps m/m to 0.6%, the lowest rate in five months. The highest annual growth in prices was again in the Housing sector where costs were +5.1% y/y, led by higher utility bills and rental prices. Alcoholic Beverages & Tobacco (+3.1% y/y), Restaurants & Hotels (+1.9%), Education (+1.7%) and Transport (+0.9%) costs all grew by higher than the headline inflation rate in the past year. However, deflationary pressures remain in the Furnishings (-4.1% y/y), Food (-2.0%), Communications (-1.5%) and Clothing (-1.1%) sectors with a weak GBP likely to be a factor in at least some of these categories.
Irish Economy: NTMA targets up to €18bn of issuance in 2019
The NTMA has released its Funding Statement for 2019 and expects bond issuance next year to amount to €14-18bn. The NTMA intends to continue its strategy of pre-funding in advance of large redemptions and will meet its target through syndicated issues and a series of regular auctions. It also notes potential opportunities for “further diversification” of its issuance in 2019. The NTMA raised €18bn in debt markets in 2018 through €17.25bn of regular bond issues in addition to some private placement and non-competitive auctions, while it also issued Ireland’s first sovereign “Green Bond”. Funding this year had an average maturity of 12 years and an average interest rate of just over 1% - an extraordinary turnaround from the early part of this decade when debt markets were essentially closed to the sovereign.
The ECB kept rates on hold at yesterday’s meeting, in line with market and our own expectations. As such the deposit rate remains at -0.40%, the main refinancing rate at zero and the marginal lending rate at +0.25%. Additionally the ECB confirmed its well flagged plan to halt net asset purchases (QE), starting January, from its current pace of €15bn per month. It added to this noting it was “enhancing its forward guidance on reinvestment” and plans to continue reinvesting in full the principal payments from maturing APP (QE) securities “for an extended period of time past the date when it starts raising the key ECB interest rates” and in any case for as long as necessary. On the timing for the first rate move, the short statement repeated the Governing Council’s intention for key ECB interest rates to remain at their present levels “at least through the summer of 2019”.
Last night Theresa May met with European leaders at the last EU Council meeting of 2018. Reports vary on how warm a reception she received in Brussels, but the summit was inconclusive in terms of any new compromise, although that was as more or less as expected. Donald Tusk’s statement following the summit reiterated that the Withdrawal Treaty was not open to renegotiation, a position that has been pushed by European leaders including Angela Merkel ever since PM May decided to postpone the meaningful vote earlier this week. Given that the Withdrawal Treaty, a legal text, has been agreed we believe that there is little chance for any reworking at this stage.
We suspect that the EU will offer some reassurances over the all contentious backstop. Indeed Mr Tusk tried to push the point that it was intended to be temporary in nature within his official remarks. However we suspect that any side letters, legal codicils or any of the other reported ideas will fall short of a legally binding text, which Tory MPs would want to see. In short the same underlying issues remain, in the fact that PM May has an incredibly difficult task in pushing her deal through parliament. In terms of the way forward, there is still no word on when the meaningful vote will take place, although Downing Street have confirmed that it will be in January. Ahead of that another EU summit may be required to approve any reassurances the EU may be prepared to give the UK - the next scheduled one is on 21 March, but we suspect that they will be able to schedule an emergency January meeting.
China data (Nov)
Figures released today by the National Bureau of Statistics painted a weak picture of the Chinese economy. The annual rate of industrial output growth weakened from 5.9% to 5.4%, the slowest pace recorded in almost three years. Retail sales growth was also disappointing, easing from 8.6% to 8.1% in November, the weakest pace since 2003. More positively, fixed asset investment in the year-to-date picked up to 5.9% (yoy) and the unemployment rate fell 0.1pp to 4.8%. Still the weakness in industrial production and retail sales has fuelled concerns that the trade despite with the US is beginning to take its toll, with the Shanghai Composite down 1.5% today (taking it below 2,600) and the renminbi weakening to 6.8944 versus the dollar.
Today’s Economic Calender
09.30 EC ECB’s Lautenschlaeger speaks
13.30 US Retail Sales
14.15 US Industrial Production