25 Jan 2019
Irish Economy: CBI pares growth forecasts
The Central Bank of Ireland (CBI) has released its first Quarterly Bulletin of 2019. Key points below.
At a headline level, the CBI has pared its GDP growth forecasts for both 2019 (by 40bps to 4.4%) and 2020 (by 10bps to 3.6%). For the record, we are on 4.5% and 3.8% for this year and the next so no quibbles from us. Within the CBI’s revised growth projections, we detect that it is expecting a more cautious path, with projected consumer spending being revised down (by 40bps to 2.1% in 2019 and by 30bps to 2.0% in 2020) even though the CBI has left its employment growth forecasts unchanged at 2.2% and 1.7% and fractionally revised up compensation per employee (to +3.4% this year and +3.6% in 2020). Due to lower confidence, investment growth is also seen as being much slower in both 2019 (from 13.5% to 8.0%) and 2020 (from 7.5% to 6.3%). The CBI has cut its housing completions forecasts for 2019 (by 1,000 to 23,000 units) and 2020 (by 1,500 to 27,000 units), so output is poised to lag well below new household formation for another few years. Reflecting a more uncertain international backdrop and slower investment, the CBI sees slower growth in both imports and exports.
Despite all the downgrades, 4.4% growth this year and 3.7% in the next would still leave Ireland as one of the fastest growing developed economies on the planet. Earlier this month, the IMF forecast that global growth would be 3.5% this year and 3.6% in 2020 and within that it saw Advanced Economies growing by 2.0% and 1.7% respectively.
On Brexit, the CBI’s forecasts are prepared under the assumption that a transition period runs to end-2020. The CBI counsels that “the nature and timing of the UK’s exit from the EU, in particular, whether it is orderly or disorderly, will have an important bearing on the growth of the Irish economy in coming years and, in the longer term, the scale of the ultimate impact of Brexit on the economy”. The Bulletin sets out a number of considerations on this, warning that “the large-scale disruption in a disorderly Brexit could reduce the growth rate of the Irish economy by up to four percentage points in the first year [i.e. from April 2019 to April 2020, the GDP growth in 2019 would be of the order of 1.5% under this scenario]”, while the long-run hit to GDP could be of the order of around 6%. The CBI puts it plainly by saying: “In the long run, it is likely that the Irish economy would adjust to the new arrangements but the short-run challenges would be immense”.
The central scenario set out by the CBI chimes with our own estimates for the Irish economy. On the Brexit scenario analysis, the CBI seems to be more pessimistic than other forecasts (the ESRI estimates GDP to grow by 4.2% this year in its baseline scenario and by 2.8% if the UK leaves on the WTO terms). In any event, that Irish GDP could take a 4pc hit in the first year from Brexit and still, ceteris paribus, post an increase is testament to the very strong growth being experienced here at this time. The coming weeks will prove pivotal for the economic outlook.
Yesterday the ECB announced its first policy decision of 2019, which saw rates kept steady, as expected. The key policy rates remained unchanged with the deposit rate held at -0.40%, the main refinancing rate at 0.00% and the marginal lending rate at +0.25%. The ECB also reconfirmed its existing guidance that its key policy rates were expected to ‘remain at their present levels at least through the summer of 2019’. With regard to its non-standard policy measures, the ECB also reaffirmed its intention to continue the reinvestment of maturing QE assets for a long as necessary.
The key focus of yesterday’s meeting was whether the ECB’s Governing Council (GC) would alter its view of the economic outlook given the recent run of weak numbers, including this morning’s Composite PMI which dropped to 50.7, the weakest since July 2013. Unsurprisingly, and as we expected, the ECB downgraded its assessment on the balance of risks to the growth outlook. It now judges these to be tilted to the ‘downside’ rather than ‘broadly balanced’. President Draghi outlined a number of factors behind this decision including geopolitical uncertainty, protectionism and financial market volatility.
Growth downgrades coming
The President also offered an acknowledgement of the weaker than expected run of recent Euro area data, where a softer external demand backdrop and country specific factors such as the auto industry in Germany were blamed. As such the GC concluded that near term growth was likely to be weaker than previously thought, a hint that the ECB’s growth projections are set to be downgraded in March (2019 was forecast at 1.7% in December). Indeed we cut our own 2019 forecast this month to 1.6% (previously 1.8%).
Deposit rate hike still on cards
Given President Draghi’s comments today we continue to view a 2019 ECB interest rate hike as still being on the table and reaffirm our view of a 20bp hike in the deposit rate to -0.20% in September. However we would note that Draghi alluded to the ECB’s reaction function today, with our assessment of his comments being that if risks persisted and the economy failed to show any pick-up then the prospects of a 2019 hike would rapidly recede. Markets seemed to echo that sentiment with the benchmark EUR/USD whipping to and fro during Mr. Draghi’s press only to slump to six week lows during US trading hours.
Givaudan Weak FY18 results on margin pressure
While the company reported revenue in line with market expectations (CHF5,527m versus INVe CHF5,538m, consensus CHF5,500m), the EBITDA margin was much lower than forecast at 20.7% versus INVe at 22.3% and consensus at 21.9%. All profit lines, therefore, missed market expectations. The company reported a 5.1% increase in EBITDA to CHF1145m (INVe CHF1235m; consensus CHF1203m) but an 8.0% decrease in FD EPS to CHF71.36 (INVe CHF84.04, consensus CHF78.6), with higher net interest costs, FX losses and tax rate contributed to the dip.
At the divisional level Fragrance revenue increased 7.8% (5.6% LFL) to CHF2525m (INVe CHF2516, consensus CHF2510m), while Flavour sales increased 10.5% to CHF3002m (INVe CHF3022m, consensus CHF3002m) with LFL growth of 4.6% augmented by a 5.3% contribution from the Naturex acquisition.
The company has reiterated its long term guidance to outpace the market with 4-5% sales growth and a free cash flow of 12-17% of sales, measured over a five-year period out to 2020, noting that for 2019 the key themes are continued top line growth, raw material prices to increase by 5-6%, which will be passed through to customers and integration of Naturex.
Coming into the results all eyes were on margin progression given the potential delayed pass-through of raw material price increases, the cost of the Givaudan Business Solutions programme and other non-company-specific market pricing issues. The pressures were greater than the market expected, management noting “a sharp and broad based increase in raw material costs”. With raw material price increases of 5-6% guided for FY19E.
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