05 Apr 2019

Irish Economy: CBI trims growth forecast

The Central Bank of Ireland (CBI) has today released its second Quarterly Bulletin of 2019. The document sets out the CBI’s views on developments in the economy.

 

 

At a headline level, the CBI sees GDP +4.2% this year (a 20bps downgrade versus its previous forecast), while for 2020 the CBI has kept its 3.6% headline growth forecast (albeit off a lower base). The downgrade is driven by slighter slower growth in gross fixed capital formation and net exports and mirrors our own recent forecast changes (we see GDP +4.3% this year and 3.3% in 2020, representing downgrades of 20bps and 50bps respectively relative to our previous projections).

 

As with our recent revisions, the main factor behind the CBI’s downgrade to headline growth is a weaker pace of global and euro area economic activity. The CBI assumes that an agreement on Brexit will be reached, while warning that a disorderly outcome “would have immediate and material economic implications, affecting most areas of economic activity, but growth [is] still expected to remain positive”. A ‘hard Brexit’, were it to happen, is seen by the CBI as reducing the growth rate by four percentage points in year one and by a further two percentage points in the second year, although growth would remain in positive territory even under this bear case scenario.

While headline figures can be distorted by factors pertaining to the multinational sector, we note that the CBI (like ourselves) paints a strong picture for the consumer, with forecasted growth in compensation per employee (3.6% this year and 3.7% in 2020) many multiples of the expected rise in the CPI (0.7% in 2019 and 1.1% next year) over the same period. Employment is projected to climb 2.1% this year and 1.7% in 2020, putting continued downward pressure on the unemployment rate.

We note that the CBI now sees 24,000 housing completions this year and a further 28,000 in 2020 (for reference, we are on 23,000 and 28,500 respectively).

The CBI’s headline forecasts effectively mirror our own so, unsurprisingly, we see little to disagree with! On a more serious note, the publication serves as another reminder of how developments at Westminster will be the main determinant of short-term economic performance here.

 

Nonfarm Payrolls

The March US employment situation report showed non-farm payrolls having risen just 20k in February, in what was the smallest monthly rise since the hurricane afflicted print of September 2017. Our assessment is that the extent of the weakness is not borne out by broader labour market indicators, or indeed by the broader economic backdrop. Rather this looks to be reflective of a drag from the weather in February and from carry through from the distortions (particularly warm weather in the January payroll week) which inflated the January print. Our expectation is for a return to something which is more representative of the underlying trend this time. We expect to see a rise of 145k in the March non-farm payroll count. Any softness in the coming releases could see the recent UST rally extend further as Fed rate cut bets will be ramped up.

 

Brexit – longer extension?

News reports suggest that EU Council President Donald Tusk will offer the UK an Article 50 extension of up to a year at the emergency EU Summit on Wednesday next week. This follows reports that (perhaps unsurprisingly) the discussions between Theresa May and Jeremy Corbyn are unlikely to break the impasse. Indeed Attorney General Geoffrey Cox remarked yesterday that if the talks failed, any delay would ‘likely to be a long one’. In terms of the wider political scene, yesterday’s by-election in Newport West resulted in Labour holding the seat with a reduced majority of 1,951. This reduces the Tories’ effective majority in Parliament to 5.

 

US-China Trade

US-China trade talks will continue today after a positive week of negotiations between officials from both sides. Optimism regarding a deal has been building to bolster risk appetite. Reports suggest many issues have been ironed out, but sticking points remain. News flows will most likely be market-moving, so market orders could be worthwhile.

 

Economic releases

13.30 US Nonfarm Payrolls

20.30 US FOMC member Bostic Speaks