12 Aug 2019

Irish Economy: Construction PMI falls to six-year low

The Ulster Bank Construction PMI fell to a six-year low in July, although the reading of 51.4 does indicate that the sector is still in expansion. The PMI was at 53.1 in June.

The housing output component of the survey fell from 58.4 in June to 55.8 in July, with this decline in line with some of the disappointing housing output statistics we’ve seen of late. That said, a reading of 55.8 still indicates a solid rate expansion in the sector. Commercial activity rose in July, with this component increasing to 54.7 from 52.8. Activity in the civil sector remains in the doldrums however and declined further in July to 40.5 from 42.3. In this regard, we noticed some interesting comments from the head of the Construction Industry Federation, Tom Parlon, over the weekend. He warned that “paralysis” in public sector procurement in the wake of recent controversies is weighing heavily on public construction projects.

Alongside indicators of weaker current activity, optimism in the construction sector has also slipped back and the future activity index declined to a six-year low with the Brexit overhang at play here. It is not a surprise to see a moderation in the rate of growth in the housing sector but the renewed decline in civil activity is particularly disappointing given the infrastructure and demographic challenges facing the country.

PTSB: Doing what it can, but rate and cost outlooks limit the upside 

One-off items helped top line revenue; meanwhile the cost trajectory is becoming more difficult despite a greater management focus. While NIM and market share held up well, the lower interest rate environment offers a margin headwind, and volume growth remains sluggish amid previously discussed Irish mortgage market issues. Further, wage inflation and continued technology spend will also likely limit cost/income improvements for the next few years, while calendar-provisioning (end 2020) may adversely impact excess capital.

UK this week

No-deal concerns remain front and centre for UK investors, with a Reuters poll of economists released late last week suggesting the chance of a “disorderly UK exit” is now seen at 35% compared against 30% a month ago. Amidst reports that the Johnson government would aim to steer any General Election into the days after the 31 October exit date, this has added to no-deal speculation. Indeed, if Mr Johnson is able to do this, it would look to close off another route to MPs blocking a no-deal. 

Sterling traded down close to the pivotal $1.20 after this news and to just over £0.93 against the euro late in the Friday trading session. Any developments that open or close doors to a no-deal Brexit, will again be the key focus. Markets will however be keeping a keen eye on UK inflation data and retail sales due on Wednesday and Thursday respectively, particularly after Friday’s disappointing GDP print.

US this week

Over the coming week, market sentiment will no doubt remain jittery as investors watch and wait for any signs of the next turn of events in the US-China dispute, looking for any actions by either administration that could act as an accelerant to the conflict. The calendar of scheduled events for next week provides no specific steer on when the next big news will hit, but President Trump’s early morning tweets will be worth watching even more closely than normal. We have a more detailed note in relation to the current US/China trade issues in our ‘Thought of the day’ piece below.

Europe & ROTW this week 

Amidst much nervousness over the global outlook, the data calendar will also be eyed closely. In particular, industrial sector releases will be of interest where the weakness has been most evident of late. Indeed, last week’s German industrial production data exacerbated concerns over whether the Eurozone’s largest economy might be headed for a further protracted period of weakness. Figures showed the sector contracting by 1.5% (m/m) in June whilst year-on-year industrial output fell 5.2%. Industrial sector releases over the coming week include those for the Euro area, China and Japan, whilst early steers for August come in the shape of the US Empire State survey. 

On the central bank front, this week looks to be a quieter one for scheduled meetings. However, emergency meetings could be held if market turmoil steps up again. After a spate of surprise or bigger than expected rate cuts by a number of central banks (RBI (India), RBNZ (New Zealand), BOT (Thailand), BSP (Philippines)) last week, we also note the South Korean central bank met for an unscheduled meeting to discuss the market volatility.


US/China trade update

Concerns over the US/Chinese trade dispute continue to be a central theme for markets, with the S&P500 falling 0.7% on Friday. In terms of the way forward, it remains to be seen whether the two countries will be able to defuse the latest escalation, which will see the US impose a 10% tariff on the $300bn of Chinese imports not targeted in previous tariff round from the 1 September. As things currently stand the US has invited Chinese negotiators to the US for further talks in early September, with White House advisor Peter Navarro stating on Friday that he expected these talks to go ahead. This came after comments from President Trump raised concerns on Friday as to whether these talks would take place. To date there has been no response from the Chinese side as to whether they will go ahead. 

The Shanghai composite is 0.8% firmer this morning supported by the prospect of talks between the two countries occurring at some point, whilst the PBoC also set the USD:CNY mid-point slightly firmer than expected at 7.0211.

Economic Releases

Nothing of note.