11 Nov 2019

Irish Economy: Construction PMI below 50 again

his morning’s Ulster Bank Construction PMI report for October was disappointing with the headline PMI falling to 46.2 from 48.3 in September.

This is the lowest level for the Construction PMI in more than six years, with the three sub-sectors of Commercial, Civil Engineering and Housing all losing momentum in the month. In line with the decline in the headline PMI, new orders fell in October for the first time since June 2013 with panellists citing Brexit as a cause. Housing activity, which has been at the forefront of growth in the sector is still expanding but, at 51.3 last month, the rate of growth is modest and slowing and reflects what we are seeing from some of the other sectoral indicators at the moment, such as completions data.

Irish Economy: New car sales lower YTD despite good October 

The latest CSO data on new vehicle licences show an 11.8% y/y jump in the number of new cars sales in October, but this increase was not enough to overturn the overall negative trend in the YTD.

New car sales are -6.6% YTD (7,800 vehicles) with this decline mirroring the increase in the number of second-hand cars being licensed in Ireland for the first time (i.e. imports) which are +7.7% (6,500 vehicles in the same period). The steep decline in the value of Sterling following the Brexit vote has prompted a significant shift from new car sales to second-hand imports from Sterling retailers in the past three years, although we suspect that Brexit is also having an impact on the sale of “big ticket” items at present as evidenced by the prevailing weak consumer sentiment environment. 

Cairn Homes: Expectations tempered

Cairn’s interim results in September underlined the group’s operational progress and strong demand for its product. It is on track to meet its unit output targets to FY21, a year in which we expect it to complete 1,475 unit sales, and its large, well-located landbank gives the group plenty of levers to meet its target. The main disappointment however was with the group’s gross margin of 18.6% in H119, rising to a guided 19.5% in FY19. Higher than expected costs at the complex high-end Hanover Quay development (these are a one-off, but were not flagged before the sale) and lower price inflation were the main factors here. We have reduced our margin expectations by 150-210bps across our forecast horizon as a result, while our lower revenue estimates reflect the group’s increased focus on duplex/apartment units at some established housing sites, which lowers the entry price and broadens its buyer pool.

The country continues to experience a significant housing shortfall. Large, equity-funded developers are needed to address the deficit and these players enjoy scale and funding advantages in a fragmented and sub-scale industry. The sharp slowdown in House Price Inflation (HPI) has concerned some investors, but the Central Bank’s lending rules are a key factor here and market structures favour first-time buyers. We continue to expect 3% HPI in FY20 and FY21, which is actually lower than wage growth in the economy at present. Reflecting the group’s strengthening cash position, it has paid its maiden dividend and commenced a €25m buyback programme. We expect this dividend to grow and Cairn to become one of the highest dividend payers on the ISEQ index and with a dividend yield broadly in line with that of the large UK homebuilders currently.

Spanish elections

Results from yesterday’s Spanish elections were very much as polls had predicted. The two main points were; i) another inconclusive result with no easy path towards forming a government -  the Socialists (PSOE) made marginal losses but are still clearly the largest party; and ii) the strong rise of the far-right VOX, largely at the expense of centrist Ciudadanos on the issue of Catalan separatism. The centre-right PP also made gains. The next step will now be for PSOE leader and outgoing PM Pedro Sanchez to see if he can form some sort of working administration with left-wing Podemos, perhaps even with some support from left-wing Catalan parties.

Moody’s changes UK outlook

On Friday evening, Moody’s changed the outlook on the UK sovereign rating from stable to negative, whilst affirming the Aa2 rating. In doing so, it cited the UK’s economic and fiscal strength being weaker going forward and more susceptible to shocks than previously assumed. 

Importantly, Moody’s pointed to the UK’s political climate and the absence of “meaningful pressure for debt-reducing fiscal policies”. The latter, i.e. political party spending intentions amidst the General Election campaign, were front and centre of the weekend’s press as Labour and the Conservatives clashed hard over the cost of the promises. The Conservative Party claimed that Labour spending commitments could total £1trn over the next five years, which Labour dismissed as “fake news”. Neither party has released its manifesto yet, so in any case the costings are based on a series of assumptions. 

In terms of polling, the recent run of polls show the Conservatives still with a sizeable lead over Labour of around 11 to 12pts.

UK this week

The week is bursting with Tier 1 UK data releases. Kicking things off today is GDP, which we forecast will have expanded 0.4% over Q3 even under our assumption that the quarter was capped off with a 0.2% fall in output in September. Tuesday then sees the usual labour market release, for which we expect to see the unemployment rate edge back down to 3.8%. Following this, on Wednesday is CPI inflation which we look for the annual rate to ease to 1.4% due to the effect of the Ofgem energy price cap. Finally, on Thursday we look for retail sales to show a monthly rise of 0.4% in September after August’s flat outturn.

Europe this week

The key focus will be on the German GDP figures on Thursday which look set to confirm that the Eurozone’s largest economy is in a technical recession after today’s industrial production release.


In the meantime, Spaniards are set to participate in their second election this year with polls indicating that another hung parliament is set to be returned. Other data releases include the German ZEW survey on Tuesday, Eurozone industrial production on Wednesday, the second estimate of Eurozone GDP for Q3 on Thursday and ‘final’ HICP inflation on Friday.

US this week

Investors will be on the lookout for further developments in the US-China trade dispute, these may well be overshadowed by the decision due on Thursday relating to the Section 232 investigation into whether foreign cars pose a national security threat to the US. President Donald Trump has the option to impose tariffs on cars imported from the likes of the EU and South Korea or kick the can further down the road, having already put off the decision for six months in May.


Also, Fed Chair Jerome Powell is set to testify to lawmakers on both Wednesday and Thursday, whereas key data releases include the NFIB small business optimism, CPI inflation and retail sales.

ROTW this week 

Last week saw the People’s Bank of China lower the 1-year medium-term lending facility by 5bp to 3.25% in the first cut since February 2016. This in-turn should lead to a lowering of the reformed Loan Prime Rate when it is next published on 20 November. Before then, data this week includes Japanese core machinery orders and Q3 GDP, as well as the usual Chinese monthly cyclical indicators on Thursday (i.e. industrial production and retail sales). Note finally that a decision from the Reserve Bank of New Zealand is due Wednesday.


Economic Releases

UK 09.30 GDP