27 May 2019

Irish Economy: Ireland bucks the trend

Preliminary results from Ireland’s local and European elections indicate that the country has bucked the trend seen elsewhere in Europe, with gains being made by the centrist parties. The Green Party was another big winner from Friday’s contests.


With first counts declared in 165 of Ireland’s 166 local election wards, the traditional three parties of government – Fine Gael, Fianna Fáil and Labour – look to have secured a combined 57.8% of the vote, +130bps on the 2014 contest. According to the seat counter on the Irish Independent website, with 86 seats (of 949) left to be filled, those three parties have a combined 534 seats so far, which puts them on course to easily eclipse the 2014 total (based on all 949 seats filled) of 553. The Greens quadrupled their seats to 47 (so far) versus the 12 secured in 2014. The big losers are the far left, with Sinn Féin having picked up only 74 seats thus far (versus a total of 159 in 2014) and the Solidarity – People Before Profit alliance has secured just 11 seats thus far, compared to a total of 28 in 2014.


In the European elections, while none of Ireland’s 13 seats have been filled yet, the indications are that Fine Gael and Fianna Fáil could win seven seats, up from five (of the then 11 seats) they won in 2014.


These results chime with our expectations (see “This week’s Irish elections are likely to show a small swing to the centre ground”, published on 21 May). While coalition agreements are likely to take time to hammer out across the individual councils, our sense is that the new composition of the local authorities is, at the margin, positive for the REITs and housebuilders. We note that the Taoiseach (Prime Minister) yesterday appeared to hint of the potential for an early general election, but this seems an unlikely outturn given that: (i) No party secured even 30% of the vote, suggesting that the messy arithmetic of the current Dáil (lower house of parliament) would be replicated in a near-term general election; (ii) the Taoiseach’s Fine Gael party looks like it has secured fewer votes and seats than the main opposition party, Fianna Fáil, which lowers the incentive for Fine Gael to go to the country; and (iii) many voters would be unforgiving of an administration that would create political uncertainty against the backdrop of Brexit.


UK this week

Following on from last week’s political drama where we saw UK PM, Theresa May announce that she will formally resign as Tory leader and Prime Minister on the 7 June, we await the official results of the European elections. It is widely expected that Nigel Farage’s Brexit party will claim over 30% of the vote at the expense of the flailing Labour and the Tory parties, we go into more detail in our ‘Thought of the day’ piece below.


After last week’s political high jinks in the UK, we see a further Brexit delay of around six months; a greater risk of ‘no deal’; a higher chance of an early general election; and no rise in the Bank rate until August 2020. UK economic data due this week (e.g. mortgage statistics, Nationwide house price index) should pale into comparative insignificance against the backdrop of current political events. Please note that it’s a public holiday in the UK today.


Europe & ROTW this week

In the wider EU, Sunday’s EP results will have a bearing on who heads up the various institutions such as the European Commission, the European Council and perhaps indirectly, the European Central Bank.


On the indicator side in the Euro area, we will take a close look at bank lending flows (Tuesday) and preliminary HICP (inflation) data from Germany, France and Italy towards the end of the week. From China we get official manufacturing and non-manufacturing PMIs for May on Friday 31st will highlight the extent to which the economy in the People’s Republic is hurting against the background of the trade war. April’s data showed both of these survey readings slipping back after a rebound in March.


In Canada, the Bank of Canada makes its policy announcement on Wednesday. Governor Poloz recently remarked that he still believes interest rates will continue to rise once headwinds to growth dissipate. But we note the Canadian yield curve has begun to price in a small chance of a cut in rates this year, a feature that is that common to many developed market curves. This time however the central bank looks set to maintain its overnight rate target at 1.75%.


US this week

Stateside (and globally) markets will be on alert for any progress (or the lack of it) in repairing trade relations between the US and China. A focal point for this will be the G20 Summit in Osaka on 28/29 June, ahead of which we are hoping for indications that the talks are back on track. However there are increasing fears that this will not be the case and that the US could carry out its threat to impose additional 25% tariffs on a further $300bn of Chinese imports. Turning to economic numbers, we note that second estimates of Q1 US GDP will be released on Thursday and April’s estimates of PCE price inflation on Friday.


Thought of the day

UK election shows reluctance for compromise

With 10 of 12 regions counted, Nigel Farage’s Brexit party have been the big winner of the UK European elections, winning 33% of the vote, and 28 seats in the party’s debut. Their dominance of the elections will be ammunition for pro-Brexit candidates in the Tory party leadership contest to steer the UK towards a harder Brexit, and may even deter them from seeking an extension beyond October. However with much of the Brexit party’s gain cannibalised from UKIP (who were down 23% losing all 16 of their seats), Remain parties, Lib Dems (+14%), Greens (+4.6%) and Change UK (a disappointing 3.6%) can reasonably argue that parties with a remain stance made a greater net gain from this contest.


The clear losers have been the Conservative and Labour parties, who are both being punished for trying to deliver a compromise on Brexit. Conservatives by delivering a reasonably moderate Brexit with a transition period, and Labour who have yet fully back a second referendum. While May has already announced her departure, the result could increase pressure on the Labour party to back a second referendum.


Overall, the pound has recovered marginally from its levels on Friday evening, however with sentiment pushing towards the extremes, we expect volatility and weakness in the pound to continue for the foreseeable future.


Economic Releases

09.40  EC      ECB’s Coeure speaking
           US      Memorial day holiday
           UK      Spring Bank holiday