12 Jul 2019

Irish Economy - Economic growth surprises to the upside

National accounts data released by the CSO reveal a pace of expansion that is stronger than previously anticipated. 

The CSO now estimates that the economy expanded by 8.2% in GDP terms last year, representing an upward revision to the 6.7% the agency had originally pencilled in. This confirms Ireland’s position as the fastest-growing economy in the EU28 for a second successive year. In nominal GDP terms output rose 9.1% in 2018, which is helpful to the country’s headline deficit and debt metrics. Modified Gross National Income (GNI*), a measure of growth that minimises multinational effects, recorded nominal growth of 7.3% last year. 


For Q119, the CSO data show headline (GDP) growth of 2.4% q/q (GNP +2.1% q/q). On an annual basis, GDP is +6.3% y/y. The expenditure side of the accounts show personal consumption +0.9% q/q, government consumption +0.5% q/q, investment -24.4% q/q, exports +1.0% q/q and imports -2.8% q/q. Taking those in turn, personal consumption was ahead of what we would have expected given the 100bps q/q drop in retail sales volumes in Q119, although tourism data for the quarter were strong. Government expenditure, on an annual basis, was +3.5%, broadly tracking the 3.9% FY guidance from the Department of Finance. The sharp drop in gross fixed capital formation was heavily influenced by the multinational sector (expenditure on intangibles was -27.3% q/q) and slower machinery & equipment outlays (-24.8% q/q, or -8.2% q/q if aircraft are excluded), with the latter having been signalled by weak new goods vehicle sales during Q1. Expenditure on building and construction was +5.0% q/q. On the export side, growth was driven by the merchandise (goods) side, where volumes were +2.8% q/q, with a portion of this growth undoubtedly tied to precautionary inventory build by UK customers ahead of the original Brexit date of end-March. In headline terms, the volume of goods imports dropped by almost a tenth on a quarterly basis in Q119, but some of this is due to the marked fall in aircraft imports captured in the investment number (so essentially no net effect on GDP). 


Balance of Payments data released alongside the national accounts show that the current account surplus was €11bn or 13.2% of quarterly GDP in Q119, leaving the country well positioned for at least a repeat of last year’s €34.3bn / 10.6% (was 9.1%) of GDP surplus. Within the data, we note that merchandise exports to the UK were €5.54bn in Q119 compared to €5.43bn a year earlier. 


The 6.3% annual growth in Q119 is ahead of the 4.3% we have pencilled in for the full-year (note also that the base is higher on the back of the upward revision to the 2018 numbers), but it is worth noting that some of the Q1 performance is flattered by Brexit effects and multinational distortions. There is also the potential for a growth shock depending on the evolution of assorted trade spats and the Brexit process. Therefore, we are unlikely to make material changes to our headline estimates until we have more clarity on those.

Irish Economy - NTMA raises another €1bn

Ireland’s NTMA yesterday raised €1bn from the sale of bonds maturing in 2029 and 2033 by auction. 


The tap of the 1.1% Treasury Bond 2029 raised €600m at a yield of just 13.6bps. It attracted €1.475bn of demand (2.5x covered). For its part, the tap of the 1.3% Treasury Bond 2033 was completed at a yield of 49.7bps, with the €972m of bids received producing a cover ratio of 2.4x. 


These latest sales bring the cumulative proceeds from the agency’s issuance of benchmark bonds so far this year to €11.25bn, which compares to the full year funding target range of €14-18bn. 


We forecast that the Sovereign will run a second successive annual general government surplus this year, so the proceeds from these sales will be used to refinance existing borrowings. Therefore, yesterday’s sales provide long-term funds to the agency at a blended yield of only 0.3% which will be used to redeem an existing stock of debt with a weighted average cost of 2.4% (within that, the most expensive issuance is to be found at the shorter end of the curve). 

Cairn Homes - CFO resigns 

Cairn Homes has this morning announced that its CFO Tim Kenny will leave his position in January. 


Mr Kenny is leaving Cairn to take up a senior management position with a private company, with the news coming just short of his two-year anniversary with Cairn. He joined the group following a 12-year stint as Group Finance Director/Company Secretary with Musgrave Group plc, having previously served as Finance Director with Dunloe Ewart plc.


The news comes as a disappointment given that Mr. Kenny brought a wealth of commercial experience to his role with Cairn, but this is tempered somewhat given that it's the group's intention that a successor will be in place before Mr. Kenny leaves his role in six months. We remain positive on Cairn given the fundamental imbalance between supply and demand, particularly at the affordable end of the new homes market.

Irish banks – CBI Financial Stability Review highlights external risks

The Central Bank’s Financial Stability Review released this morning highlights the risks to the Irish economy and financial system from external factors, including the potential for a hard or disorderly Brexit. 


The main risks identified by the CBI that the financial system currently faces stem from external developments, and include a disorderly Brexit outcome, an abrupt tightening in global financial conditions, and a re-emergence of sovereign debt sustainability concerns in the Euro area.


Domestically the main risks are an abrupt fall in Irish property prices (this potentially sensitive to any hard Brexit outcome), the still constrained level of profitability in the banking sector (including questions over sustainability in any economic downturn), and the related possibility of elevated risk-taking behaviour by lenders and borrowers. While the domestic banking sector has become more resilient to a downturn in recent years through higher capital and lower NPLs, and borrowers similarly through reduced debt levels, vulnerabilities remain in the CBI’s view given the still elevated level of both debt and NPLs. Additionally, and somewhat related to this, the Minister for Finance has agreed to give the Central Bank the power to use the Systemic Risk Buffer (SyRB) if they deem it necessary to deal with non-cyclical system risks to the banking sector. To support the precise design and calibration of the SyRB, the CBI is considering the interaction between different capital buffers and the overall level of bank capital that is appropriate for a small, highly globalised economy, such as Ireland. 


We see a rising risk of the SyRB being implemented and creating yet another capital buffer obligation for the banks to adhere to, acting as yet another headwind to medium term ROE expansion for all of the domestic banking sector.

Irish REITs/builders – Lone Star purchases Cherrywood site for €120m

According to the Irish Times this morning, Lone Star has purchased a site in Cherrywood, South Dublin for an estimated €120m, from Hines Real Estate/Kings Street Capital.


The site consists of two plots of land totalling approximately 118 acres. It is estimated that this land has the potential to bring new 2,600 residential properties to the market, which may bring some relief to the excess demand for housing in Dublin. The site is located alongside prime roads including the M50 and N11, providing essential transport networks for future residents.


While the development of such property is subject to future planning approval, it looks to be a positive development for prospective residential buyers in Dublin.


ECB June minutes

ECB officials signalled at their June policy meeting that they will consider injecting a fresh stimulus into the eurozone economy.


The Governing Council (GC) widely agreed to take three actions at this meeting; i) to extend the guidance that rates would remain at present levels at least through the first half of 2020 (from end-2019 previously); ii) to reiterate the GC’s intention to reinvest maturing bonds that it has purchased; and iii) to set the rates on its new liquidity facility, TLTRO3. It also stated that ‘the Governing Council needed to be ready and prepared to ease the monetary policy stance further by adjusting all of its instruments, as appropriate, to achieve its price stability objective’. This is a clear reference to a further cut in interest rates and/or restarting QE. 


We would note two further points: i) possible side effects should not get in the way of bank intermediation. In other words, the GC is considering some sort of mitigating measures to help the banks should it ease again (banks have to place surplus liquidity with the ECB at their deposit accounts at -0.40%. Lowering the Deposit rate or restarting QE would both increase these costs).  The obvious measure here would be to ‘tier’ the Deposit rate structure, although the full details could be complex. Second, that any such side effects would need to be addressed by ‘adequate macro prudential policies’. It did not go into much detail here. 

From these minutes and subsequent senior ECB comments, it is getting much clearer that the ECB is preparing the ground for a cut in the Deposit rate, probably by 10bps in September to -0.50%.  We would not rule out a further reduction early next year nor a return to asset purchases at some stage, but the jury is out on the latter two measures.

US CPI inflation 

Headline and core inflation measures both rose by a touch more than markets had expected month-to-month; the headline was up 0.1% (consensus 0.0%) and ex-food and energy the rise was 0.3% (consensus 0.2%). On a year-over-year basis, headline inflation came down from 1.8% to 1.6% whilst the core measure nudged up from 2.0% to 2.1%. Note, that the Fed's favoured inflation metric is PCE inflation, where 'core' PCE inflation was last recorded at 1.6%. June PCE inflation figures are not due until the day before the July 31st FOMC decision.

Brent Crude trades over $67/barrel 

Sentiment in oil markets has continued to improve, US crude inventories fell by 9.5m barrels according to figures published this week. It appears that Iran did try to intercept a British oil tanker and was only prevented from doing so by the involvement of its Royal Navy escort. Continued instability in the region usually leads to higher prices. 

In addition, the publication of the June FOMC minutes and US Fed Chairman Powell's testimony to the House Financial Services Committee all added to the impression that a cut in interest rates is now becoming likely. This sent asset markets higher (to a new all-time high for the S&P). Brent reached a high of 67.40 $/b yesterday which took it through the highs ahead of the OPEC meeting and the 50 and 100-day moving averages. The market may be over reacting to normal seasonal patterns, but momentum and sentiment has clearly adopted a more bullish tone.

Economic Releases

09.30 UK MPC Member Vlieghe speaks

10.00 EZ Industrial Productions

13.30 US PPI