UK Election

12 Dec 2019

Irish Economy: ESRI expects 3.3% growth next year

In its latest economic commentary the ESRI has upgraded its GDP growth forecast for both this year and next.

The ESRI now expects growth to reach 5.8% this year, a significant 90bps increase on its previous forecast, with the increase attributable to higher exports. For 2020, its new forecast is for 3.3% growth, +20bps on its previous forecast. The labour market is also expected to continue to strengthen with the unemployment rate set to decline to 4.6% in 2020 according to this morning’s report. 

The ESRI also pays some attention to the issue of the remarkable rise in Corporation Tax receipts and the risk that this revenue source could diminish in future years (the Department of Finance has also published research on this topic recently). Taking two scenarios in which the “windfall” element of Corporation Tax (i.e. the proportion that is due to factors other than economic fundamentals such as firm-specific decisions) declines, the ESRI finds that such a fall would have a material and lasting impact on the country’s fiscal position. It therefore advises that it is “imperative” that such “windfall” receipts are not used to fund current Government expenditure and that stronger fiscal buffers should be built to mitigate the potential impact on the economy – sage advice for sure, but we sense that this is easier said than done for a minority government facing a multitude of spending demands.

Fed leave rates unchanged

Last night, the Federal Reserve announced its last policy decision of the year, maintaining the Federal funds target rate range at 1.50 - 1.75%, as was universally expected following the three cuts in interest rates over the course of this year. The FOMC’s broad assessment of economic conditions was also broadly unchanged with the statement, more or less mirroring that from October, with the labour market once again described as strong, household spending rising at a strong pace and business investment remaining weak. Meanwhile, it was once again noted that inflation was running below the 2% target. 

In terms of the accompanying  information, the so called ‘dot plot’ witnessed a downward revision to the 2020 projections with participants now expecting interest rates to remain steady at current levels throughout next year; the previous projections envisaged one hike in 2020. Thereafter, the Fed projections see one hike in each of 2021 and 2022. 

Market reaction has seen some mild USD weakness with the benchmark EUR/USD rate taking out the pivotal $1.11 level, the next strong resistance level is in/around 41.1180. Meanwhile, 10yr US Treasury yields slipped in the immediate aftermath but are now almost back at pre-FOMC levels at 1.80%.   

ECB preview

Later today, the ECB will deliver its first policy decision under the leadership of new President Christine Lagarde and also the last of the year. We see no change in the stance of policy, with the key policy rates held at -0.50% (Deposit rate), 0.00% (Main refinancing rate) and +0.25% (Marginal lending rate). QE will also be maintained at a monthly pace of €20bn, although as per standard ECB practice bond purchases will be halted between 19 and 31 Dec on account of the Christmas period. For the moment the ECB appears to be in a temporary policy pause period, with the account of the October meeting highlighting a Governing Council (GC) seemingly happy to take a “wait and see” approach as it assesses the impact of September’s policy package. 

One of the questions under consideration by ECB watchers is whether the new President will herald any changes in policy direction over the months ahead. We suspect not and that Christine Lagarde will take a similar path to her predecessor Mario Draghi. With inflation still likely to be judged below target in December’s projections and risks still tilted to the downside, we suspect that the ECB will instigate one further cut in the Deposit rate to -0.60% in Q1 2020. However, we expect that will be the extent of any additional easing, with the ECB then likely to enter into an extended policy pause period until late 2022, albeit with QE ongoing over much of this time.

Investec extended opening hours

The Investec Treasury dealing desk will be here until 11pm tonight in order to cover the much anticipated UK General election. Reporting throughout the day is expected to be light, as there is a media blackout from 12.30am (this morning) until 10pm this evening. We expect an exit poll shortly after 10pm, which has been a good guide to the outcome of previous UK general elections. 

Boris Johnson's Conservative party continue to poll strongly in the lead up to the vote and this is reflected in a strengthening pound. However the lower range of the polls indicate that the eventual winning margin could be narrow enough to cause the Tory party difficulty and as we have seen in the past, polls aren’t always an accurate predictor, especially when there is a particular factor (Brexit in this case) which is causing certain regions to diverge from historic voting patterns. In light of the potential significance of this event, we are extending our regular opening hours to provide coverage until 11pm. We will also be available from 7am tomorrow morning to keep you updated as the results unfold.

Economic Releases

UK 07.00 General Election

EU 10.00 Industrial Production

EU 12.45 ECB announcement

EU 13.30 ECB press conference

UK 22.00 Exit Poll expected