15 Mar 2019

Irish Economy: GDP grew by 6.7% in 2018



Preliminary national accounts data for 2018 show that the economy expanded by 6.7% in GDP terms last year, modestly behind our forecast of 7.2% growth. The expenditure side of the accounts show that last year personal consumption rose by 3.0%, net expenditure by government sector was +6.4%, gross fixed capital formation (GFCF) was +9.8%, exports were +8.9% and imports were +7.0%. 



Due to the distortions produced by the multinational sector, headline national accounts data for Ireland can have a bit of a ‘random number generator’ quality to them. Nonetheless, a deep dive of the data indicates some positive trends. The growth in personal consumption will have been supported by the 2.9% rise in total employment and 3.4% growth in labour earnings (the latter compares favourably to the 0.7% increase in the CPI recorded in 2018). Furthermore, headline retail sales volumes climbed 3.8% in 2018.


The headline GFCF figure can be extremely volatile due to the treatment of intangibles and aircraft purchases. The individual components of GFCF provide a more meaningful analysis of investment trends in Ireland and point to continued , with expenditure on dwellings, improvements and other building and construction +25.9%, +22.5% and +12.1% respectively last year. Previously published new dwelling construction data show that new housing output rose 25.4% last year. The GFCF data show that headline machinery and equipment expenditure was +37.7% y/y in 2018. However, within that total, investment on ‘other transport equipment’ (aircraft) was +60.0% y/y, which implies underlying investment growth in this area was 12.8% y/y. Investment in intangibles was -10.9% last year.


On the trade side, headline exports rose 8.9% in 2018, a very impressive performance given the more uncertain external backdrop. However, this performance is flattered by the multinationals (previously released merchandise trade data show that most of the growth in goods exports was down to the pharmaceutical sector). Yesterday’s data show that the national accounts’ measure of goods exports rose 11.8% last year, while services exports were +5.2%. On the import side, national accounts data show an increase of 7.0%.


Balance of Payments data released alongside the national accounts show a current account surplus equivalent to 9.1% of GDP, which compares to 2017’s 8.5% surplus.


For 2019 our current assessment is for headline growth of 4.5%, with the moderation from last year’s blistering growth explained by a combination of trickier external conditions and some base effects. While we may make some tweaks at the margin after yesterday’s release, we would not envisage wholesale changes at this juncture.


Irish Economy: Dual track on property price growth continues


The latest Residential Property Price Index (RPPI) release from the CSO shows that Irish residential prices were -0.4% m/m in January, the third successive monthly decline following a period of 22 consecutive m/m increases. On an annual basis, prices were +5.6% y/y in January following a 6.4% y/y increase in December.


In terms of regional trends, a weaker Dublin market currently contrasts with prices outside of Dublin which are still growing reasonably strongly. Residential prices in Dublin were -1.6% m/m – the largest monthly decline in almost six years (although we note that regional data can be more volatile on a month to month basis). Prices in Dublin were +1.9% in the year to January, compared with growth of 9.5% outside of Dublin in the same period. Indeed, prices outside the capital were +0.9% m/m in January and it has now been 25 months since the last downward m/m move in this series.


While the divergence in price growth within and outside of Dublin at present is striking, we note that the recovery started earlier in Dublin (by 15 months) and has to date been stronger (+92% from trough vs. +80%). As such, it is not a surprise to see the moderation in growth also starting in the capital. Furthermore, with prices in Dublin materially higher than the rest of the country and therefore more dependent on mortgage financing, it is likely that the Central Bank’s mortgage lending restrictions are having a greater impact on prospective purchasers in the Dublin market, while external uncertainties may also be weighing more at the higher end of the market. Interestingly, despite the recent divergence in growth trajectories, residential prices in Dublin and outside of the capital are both 22% behind their respective 2007 peaks. This compares favourably with the 30-40% assumption we understand that the high street banks have incorporated into their provisioning models.


Due to the ongoing mismatch between housing output and new household formation and strong growth in real earnings (see our CPI comment for more on this), our sense is that Irish residential prices will rise by 5% this year (following 6.4% growth in 2018) which has positive implications for a number of the listed players, such as the housebuilders (stronger sales prices), banks (improved collateral values and enhanced front-book lending opportunities) and the residential-exposed REITs (ongoing increases in net asset value).


Irish banks: Mortgage arrears continue to fall


Irish owner occupied (PDH) residential mortgage arrears data released from the Central Bank of Ireland yesterday show the number of accounts in over 90 days continued to decline in Q418, marking the twenty-first consecutive quarter of declines in this category, with this number falling to 44,009 accounts, a 2.6% decline q/q and now 6.0% of all accounts.


Total gross balances in this category totalled €8.7bn, or 8.8% of total balances. The number of accounts in arrears over 720 days also continued to fall, with the 1.6% decline in Q418 marking the fourteenth consecutive decline. Accounts in arrears over 720 days accounted for 44% of all accounts in arrears at end-December, and at €2.3bn, represented 88% of arrears balances outstanding. This ultra-long term category of arrears therefore constitutes the bulk of the legacy NPL problems which remain within the Irish banking sector. Some 17% of BTL accounts were in arrears (-7.7% q/q), with 14% of all BTL accounts in arrears of more than 90 days (-8.4% q/q), with total balances in this category totalling €4.3bn at end Dec, 22% of total balances outstanding.


The number of PDH mortgage accounts that were classified as restructured at end-December was 111,504, or 15% of all mortgage accounts. Non-bank entities held 12% of all PDH mortgage accounts outstanding at end-2018; 8.1% were held by regulated retail credit firms with the remaining 3.5% held by unregulated loan owners. Unregulated loan owners held 22% of all PDH mortgages in arrears over 720 days.


Irish Economy: CPI at 0.6% in February


The latest CPI release from Ireland’s CSO shows that the headline annual rate of inflation was 0.6% in February, little changed from January’s 0.7%.


The main factors underpinning the annual increase in the CPI were Housing and Utilities, Restaurants and Hotels and Alcohol and Tobacco.


Three sub-indices that we closely track are Private Rents, Insurance and Accommodation Services. Private Rents were +0.3% m/m and +5.7% y/y in February, with the meaningful annual growth here representing the ongoing mismatch between housing supply and demand. Insurance prices were +0.4% m/m and –2.9% y/y last month, with the change here reflecting favourable developments in the claims environment. Accommodation Services prices were +4.8% m/m and +1.5% y/y. While seasonal factors render the monthly moves in this sub-index to be less meaningful, the annual improvement reflects ongoing strong demand from domestic and overseas customers.


The data for February mean that the headline annual rate of inflation has been persistently sub-1% for six years now, underpinning a material improvement in household real disposable earnings (helped by tighter labour market conditions, wage growth accelerated to a post-crisis high of +4.1% y/y in Q418).


Brexit vote on Article 50 period extension


Yesterday MPs voted in favour (by 412 to 202) of the unamended government motion on whether to request an extension to the Article 50 period, beyond 29 March. As such, Parliament has now backed the notion that if a Brexit deal is reached (backed by the UK Parliament) by March 20, the UK will ask for the Brexit negotiating period to be extended until June 30, just before the new European Parliament meets. If a deal is not agreed before 20 March, the second part of the motion sees Parliament recognise that “it is highly likely the European Council at its meeting the following day would require a clear purpose for any extension, not least to determine its length, and any extension beyond 30 June 2019 would require the United Kingdom to hold European Parliament elections in May 2019”.


The motion is seen paving the way for PM May to have a third attempt at getting her “meaningful vote” passed next week with the second point in the motion clearly another big hint to the Eurosceptic ERG that they might want to back PM May’s deal in the next “meaningful vote” if they want to avoid a lengthy delay and with it, limit the risk of a second referendum or General Election. As such, it seems likely the PM will now aim for another “meaningful vote” next week, perhaps on Wednesday, though she has not confirmed this yet tonight. Of course, the arithmetic still looks very challenging given that May suffered a defeat of 149 votes on the Brexit deal vote earlier this week. Importantly also, although the vote on the overall motion today was a free vote, numerous senior Cabinet ministers (Gavin Williamson, Stephen Barclay and Liam Fox) were reportedly seen in the ‘no’ lobby, highlighting the battle the PM faces in bringing even her own government together.


Third Meaningful Vote


In terms of a third “meaningful vote”, PM May might be banking on additional legal advice from Attorney General Geoffrey Cox (based on Article 62 of the Vienna Convention), alongside the threat of a lengthy delay, as a route to get her deal across the line. Even so, this looks to be an uphill struggle for the PM, even if she manages to get her confidence and supply partner, the DUP, to back the deal next week. The extension request is now expected to be taken to the 21-22 March EU Summit and would no doubt be subject to plenty of horse trading, with it needing the backing of all other 27 EU member states and with various permutations possible. Sterling actually weakened slightly but has since recovered.


Dovish BoJ set tone for FOMC


The Bank of Japan (BoJ) kept rates on hold and maintained their monetary easing and forward guidance at their meeting last night. Governor Kuroda also reiterated the BoJ’s commitment to its 2% inflation target despite earlier warnings from Finance Minister Taro Aso about too much focus on the inflation target prompting speculation that the central bank might remove inflation targeting as a major policy goal. The rest of the meeting followed a similar script to last Thursday’s ECB meeting. Like the ECB, the BoJ downgraded their overall view of the economy, and also included a defence of negative rates. They also noted a reliance on Chinese stimulus to halt a deterioration in the global economy.


The meeting will very likely set the tone for next week’s policy meetings, with the FOMC, and Bank of England both holding policy meetings next week. The Fed will likely reiterate their “patient” stance, and may give further insight into how long they intend to pause the run-off of balance sheet assets. Likewise, yesterday’s evenings vote to request an extension (long or short) to the triggering of A.50 will likely give the Bank of England sufficient motive to hold off on any rates hikes until there is more clarity on the direction of Brexit negotiations.


Economic releases


EU        10.00 CPI (final)

US        12.30 Empire State manufacturing survey

US        13.15 Industrial production