04 Jun 2019

Irish Economy: Manufacturing sector growth at its weakest for 34 months

The latest AIB Ireland Manufacturing PMI release indicates that the rate of growth in activity in the sector has moderated to its weakest since July 2016 (the immediate aftermath of the UK’s vote for Brexit). The headline PMI was 50.4 in May, down from April’s 52.5. The sector has posted 72 successive above-50 readings.


We had anticipated some moderation in the index during Q2 given that the Q1 performance was flattered by precautionary stockpiling ahead of the original Brexit date of end-March 2019. Indeed, the release for April had shown some significant m/m moves in inventories (stocks of finished goods jumped to a series high while pre-production inventories rose for a seventh successive month). In today’s report we see that stocks of finished goods fell during May as panellists “made a concerted effort to reduce their post-production inventories…as a result of receiving fewer customer orders”. While pre-production inventories rose again in May, this was in spite of the first reduction in purchasing activity since July 2016 (so reflective of softer customer demand) while “anecdotal evidence from panellists indicated that many firms had reached their contingency stock levels for Brexit”.


Today’s release shows that manufacturing output fell into negative territory for the first time since the Brexit referendum, while both total and overseas new business also declined during the month. On the export trade, there was an unsurprising drop in demand from UK customers.


In terms of the positives from today’s release, we take heart from the ongoing expansion in employment in the sector (firms have added to headcounts for 32 successive months now) and the improvement in business sentiment (to a five month high), with 52% of firms anticipating a rise in output from present levels in 12 months’ time. Margin news was positive, with input price inflation falling to a three year low, while the rate of output charge inflation quickened from April.


While the ‘B’ word is prominent throughout today’s release, we echo AIB’s take that Irish manufacturers are also experiencing some pressure from the softer global growth backdrop. The near term outlook for the sector would be helped if the political machinations at Westminster were to result in some useful clarity for the business community.


Aryzta Q319A marginally behind, guidance tempered

Aryzta this morning issued a mixed Q319A trading statement marginally behind expectations. Management also clipped EBITDA guidance. In its H119A results management reiterated previous guidance for mid- to high-single digit organic EBITDA growth. This has now been tempered to low-single-digit underlying EBITDA growth for FY19. That said, the market only has 2.7% pencilled in (Bloomberg consensus) and so while sentiment will be weak in the short-term there should be little adjustment to market numbers.


The company reported a 0.6% decline in Group revenue to €847.9m (INVe €852.9m). LFL growth of 1.3% (INVe 1.9%) was augmented by a 3.4% (INVe 3.3%) FX tailwind with disposals only having a residual impact on the quarter (-0.2%). Organic growth was driven by price (2.7% versus INVe 1.3%) but disappointingly, the volume growth recorded in Q219A was not repeated in Q319A, with volumes dipping 1.4% (INVe +0.6%).


At a divisional level, Europe (50.4% of Q319A revenue) reported a 4.4% increase in revenue to €427.0m (INVe +2.9% to €420.8m). The division recorded 4.4% LFL growth (volume 0.7%, price 3.7%), ahead of our forecast of 2.5%, on pricing (INVe volume 1.0%, price 1.5%). The small impact of disposals (-0.2%) was matched by a small FX tailwind of 0.2% (INVe 0.4%). Management notes that Switzerland is performing ahead of expectations, Germany is performing well, France, Poland and Eastern Europe are in line but the UK and Ireland remains challenged.


North America (41.7% of Q319A revenue) continued to be weak on a LFL basis with reported numbers flattered by a large FX tailwind. The division reported a 3.8% increase in revenue to €353.4m (INVe 7.9% to €367.3m) with a LFL decline of 3.8% (volume -4.9%, price 1.1%) well behind our forecast of +0.5% (volume -0.5%, price 1.0%). The main driver, however was a 7.9% FX tailwind (INVe 7.4%). Management notes that the volume decline was in the Retail and Food Service channels but that Project Renew “is fully on track”.


Rest of World (8.0% of Q319A revenue) reported an 8.9% increase in revenue to €67.5m (INVe 4.6% to €64.9m) where 8.9% LFL growth (INVe 6.0%) was tempered by a 0.1% FX headwind (INVe -1.4%). Volumes were up 3.3% (INVe 4.0%) with price up 5.6% (INVe 2.0%).


UK this week

This will be Theresa May’s final week before she resigns as Prime Minister on 7 June. Note though that she will be caretaker for the role until a new leader of the Conservative Party is appointed. With US President Donald in town Brexit trade negotiators will no doubt be hoping that this visit will cement the ‘special relationship’ between both nations.


Away from this, we can expect more buildup in the Tory leadership race with nominations set to close in the week commencing 10 June. On this front we may see more candidates come forward whilst we await further detail on the hustings and TV coverage of the race. The Peterborough by-election on 6 June will be eyed as a litmus test for the strength of the Brexit party’s showing in a vote for a Westminster (rather than European Parliamentary) seat; Nigel Farage’s new party are the bookmakers’ favourite to take the seat from Labour.



Over in Vilnius, the European Central Bank (ECB) meets this week. The Lithuanian economy expanded by a solid 1.0% over the quarter in Q1, though we doubt the host city will succeed in adding a more positive tone to the meeting. Indeed, the new economic forecasts published this week will likely be less positive than the March ones, given Eurosystem staff will have built some element of recent trade developments in. If the ECB pushes down its medium term inflation forecasts any further (it already sees inflation, ex food and energy, at just 1.6% in Q4 2021), investors will probably further increase their bets that the next ECB policy move will be a cut, not a hike, in rates.


US & ROTW this week

Over the coming week, the data calendar is a busy one giving investors a situation report on the impact of the trade dispute at its current standing. Here China’s Caixin manufacturing and services PMIs will be keenly eyed. From the US we await the April trade balance, the May ISM reports and the US non-farm payroll numbers are at the end of the week. Turning to interest rate markets, particularly in the United States, all eyes will be on the words of Fed Chair Jerome Powell as he addresses a Chicago Fed policy conference. Powell’s comments will be closely scrutinised as investors look for clues as to whether this judgement on the rate outlook is correct.


Thought of the day

RBA cuts rates

As widely expected, Australia’s Reserve Bank cut the cash rate by 25bps to 1.25% this morning. The statement makes clear that the decision is aimed at supporting employment growth and providing greater confidence that inflation will be consistent with the medium-term target. Downside risks from the global trade dispute were also mentioned as having increased. The statement does not provide a further clear steer on whether we can expect further policy easing looking forward, but with the labour market clearly front and centre of the RBA’s thinking, developments here will be key to watch. Indeed, the tick up in the unemployment rate to 5.2% in April was seen as a key factor behind this morning’s policy move, alongside developments in the global backdrop. Note that for further steers on the policy outlook going forward, Governor Lowe’s speech later today titled "Today’s Reduction in the Cash Rate" might provide further information on the path going forward.


Data Releases

09.30 UK Constructions PMI
10.00 EZ CPI
13.30 US FOMC member Williams Speaks
14.45 US FOMC Chair Powell Speaks