04 Dec 2019
Irish Economy: Corporation Tax bonanza in November
Bumper Corporation Tax receipts in November, the most important month for such receipts, pushed overall tax revenues €1.4bn above target in the year to end-November and prompted the Minister for Finance to predict a surplus of €1.4bn (0.4% of GDP) in the full-year.
Total tax revenues of €9.92bn in November were 8.1% (€741m) ahead of profile (target), with the YTD outperformance improving to 2.7% (€1,447m). Year-on-year, revenues are +6.7% YTD. However, higher than expected Corporation Tax receipts (€3.12bn in November vs. a profile of €2.38bn) were responsible for all of the outperformance in the month and 97% of the YTD outperformance. Looking at the other major tax heads, reflecting the positive labour market trends at present, it was a good month for Income Tax receipts which were 4.5% (€151m) above profile in November and 0.8% (€175m) higher than budgeted in the first 11 months (+8.6% y/y). Offsetting this, VAT receipts were moderately behind profile in the month (-3.0%/-€72m) and the YTD (-1.1%/-€171m) but still +5.4% y/y in the first 11 months. Elsewhere, modest shortfalls in Excise and Stamp Duties were offset by strong capital tax receipts.
On the expenditure side, total gross voted spending was 0.9% (€527m) below expectations in the year to November, close to unchanged on the month. The majority of the underspend was in the capital budget and there is still the potential for this to unwind before year-end.
There has been renewed focus on Corporation Tax revenues in Ireland in recent weeks, in particular on the potential for the growth in these revenues to reverse – the Minister yesterday referred to the possibility as a “clear and present danger”. Looking at these data, one can see why. Corporation Tax receipts grew by 20% on average between 2014 and 2018 and now account for almost 20% of the total tax take, with a significant proportion being paid by multinational firms. Furthermore, a significant element of these receipts are unpredictable. A recent paper by the Department of Finance “Modelling Recent Developments in Corporation Tax” provided useful analytical detail on the nature of these receipts, but ultimately concluded that it is difficult to assess the extent to which the unexpected portion of the receipts is a one-off windfall or likely to be sticky. In the face of such uncertainty, the paper acknowledges the risk of permanently increasing public spending (i.e. current spending) on the basis of potentially transient revenue sources – a view that we would share, but a view that sometimes loses out to political realities.
Irish Economy: Unemployment unchanged at 4.8%
The unemployment rate was unchanged in November at 4.8% according to yesterday’s CSO release.
There was remarkably little difference in the number of unemployed persons (seasonally-adjusted) between October and November, with the November total just 100 higher m/m at 117,800. Taking a 12 month view however, there has been a 13% (17,600) reduction in the numbers out of work and the unemployment rate has fallen by 80bps to the current 4.8%. Interestingly, the number of unemployed males has decreased only marginally in the past year (-2.1%) while the number of unemployed females has fallen by 25.6%. As a result, there is now a 1.1pp differential in the female and male unemployment rates (in favour of females at 4.2% and 5.3% respectively) which is a reversal from the situation 12 months ago.
Irish Economy: Services PMI the latest indicator to rebound
The services sector rebounded in November after falling to a 7-year low in October, according to this morning’s AIB Ireland Services PMI report.
The headline PMI increased to 53.7 in November, its highest level since August and materially higher than the 50.6 seen the previous month. Activity expanded in all four of the broad service sectors covered in the survey: Financial Services, Business Services, TMT and Transport, Tourism & Leisure, with rates of activity also in that order. In line with the overall increase, new order growth quickened during November and was the fastest in three months, while new business from abroad expanded at the fastest rate since June. Similarly, the rate of job creation was solid and the fastest since June. Business confidence improved to a five-month high in November, with more than 40% of panellists predicting a rise in activity over the coming year.
All in all, this is a positive report with good news across the board. We commented yesterday that there has been a disconnect in recent months between sentiment indicators of the Irish economy, which suggest that the economy is fast losing all growth momentum, and the performance of the “hard” data, which suggest that growth remains robust and broad-based, with the near-constant stream of negative Brexit newsflow likely responsible for the divergence. The improvement in consumer sentiment reported yesterday, alongside the pick-up in the Services PMI reported today, indicate that this divergence is perhaps beginning to close.
Delays & Sanctions anger Chinese
Comments yesterday from US President Trump, stating that a deal could be delayed until after the US Presidential elections of 2020 added to the already murky market sentiment. Most if not all, US and Asian equity indices finished well in the red after Mr. Trump said that any deal is “dependent on whether I want to make it” and that “in some ways it is better to wait until after the election”.
The mood hasn’t been helped by the US House of Representatives voting overwhelmingly in favour of a bill that imposes sanctions on senior Chinese officials for their stance on its Muslim (Uighur) minority. The two US houses are apparently attempting to iron out any niggling differences between their separate bills in order to get them through by year end. On top of the trade war, and the Hong Kong Bill, this obviously strains relations still further. China perceives the US as meddling in all aspects of its economy and this latest move has sparked anger from Beijing and can only impede continuing trade negotiations.
Oil Markets mixed ahead of OPEC meeting
OPEC and its allies are sending mixed signals about whether they were considering deeper production cuts ahead of crucial talks in Vienna tomorrow, comments from signatories to OPEC+ production limits, suggested that deepening cuts was not even under discussion. The picture seems to have changed over the weekend after Iraq claimed that further cuts were on the table and a news report yesterday quoting unnamed sources, suggested that Saudi Arabia was in favour of surprising the market with a cut - a figure of 400,000 barrels/day was mentioned. This would not be enough to offset many of the forecasts for the surplus for next year, but there are now big question marks over US supply growth. Unfortunately for OPEC, the leak of this news means that the 400,000 barrels/day cut may now be a market expectation and will not come as a surprise.
Though oil markets have recovered a little on this news, the effect has been muted. The low of last month at 60.30 $/b is the next support, followed by the psychological 60 $/b and we have a major trend-line support around 57 $/b.
EU 09.00 Composite PMI
UK 09.30 Composite PMI
US 13.15 ADP employment change
US 15.00 ISM non-manufacturing index
CA 15.00 Bank of Canada rate decision