18 Jun 2019
Irish Economy: NTMA lines up a T-bill sale
Ireland’s NTMA yesterday provided details of Thursday’s scheduled T-bill auction.
Subject to market conditions, the agency will offer €500m of 12 month T-bills. This will be the second T-bill auction held so far this year, with the March auction completed at a yield of -41bps. Given market developments since then, a yield in the -50bps area seems likely.
While €500m of issuance is miniscule compared to the €206.2bn stock of general government gross debt, few would quibble with being able to access funding at a negative yield.
Today sees the release of Investec’s Q219 Irish Economy Monitor, marking the fifth anniversary since this publication shifted to a quarterly publishing schedule.
In Q214 Ireland was still taking its initial steps on the road to recovery after having only recently exited a three year EU-IMF programme. The country is in a very different place today, with the numbers at work having grown by 18% over the past five years, which has pushed the unemployment rate down to a 14 year low of 4.4% (versus 12.2% in Q214). Ireland has led the rest of the EU in terms of headline economic growth over the period, while the public finances have transitioned back into surplus. This report shows that, while there are a number of storm clouds on the horizon, there is good momentum behind most segments of the economy at this time.
High frequency indicators are throwing off some mixed signals, with May’s Manufacturing PMI dipping to its weakest (50.4) since the immediate aftermath of the UK’s vote for Brexit. The Services (57.0) and Construction (54.9) PMIs are showing much stronger growth, however. While Exchequer tax receipts have slightly undershot forecasts in the year to date, at €21.7bn in the January – May period they are still +5.7% y/y. Within that, the 7.8% growth in income tax and 8.5% rise in combined VAT and excise duty receipts point to buoyant domestic economic dynamics (even allowing for the VAT hike in the hospitality sector). While we await news of services exports, the goods performance has been extraordinary, with merchandise exports +13% y/y in the opening four months of 2019.
A key highlight at the current time is the labour market. Total employment is at a post-independence high of 2.3m and growing by c. 1,600 a week. The unemployment rate is at its lowest level since February 2005. Given the limited slack, it is no surprise to see that wage inflation has accelerated in recent times (it was +3.4% y/y in Q119). With the CPI at just +1.0% y/y in May, this implies a strong lift to real household disposable incomes, although the implications for competitiveness are less helpful.
As mentioned above, monthly merchandise trade data point to a very strong performance on the goods side so far this year. The January – April trade surplus was a remarkable €23bn, +27% y/y, although some of this is likely to be down to precautionary stock-building by UK customers ahead of the original Brexit date of end-March along with the usual multinational ‘noise’ within the trade data. Nonetheless, given the backdrop of a slowing global economy this is still a very commendable performance.
Turning to property, housing remains the most pressing issue within the economy at this time. While completions of 18,828 in the 12 months to end-Q119 were +25% y/y they are still well adrift of the range of estimates (30,000 – 50,000) of annual new household formation. For a second successive Monitor we are paring our estimates for new housebuilding activity, with completions now seen at 22,000 (was 23,000) this year and 27,000 (was 28,500) in 2020. The housebuilding sector’s ability to scale up to a level at which output meets the flow of new demand is hampered by issues around labour (total construction employment is lower than it was at the end of 2000), capital (the stock of bank credit for residential development and investment has fallen by 91% since 2010) and planning restrictions. Therefore the mismatch between supply and demand in the housing market is likely to be with us for another few years at least, so the path of least resistance for both capital values and rents remains to the upside.
Why, then, does the CSO’s Residential Property Price Index show a sharp moderation in the headline rate of house price inflation (to +3.1% y/y in April 2019, the slowest annual pace of growth since July 2013)? We attribute this to the Central Bank of Ireland’s macro-prudential mortgage rules, which place strict LTI and LTV limits over the majority of front book mortgage lending. These have a far sharper impact on the Dublin market, where annual house price inflation was just +0.5% y/y in April, as typical asking prices in the capital are 47% above the national average (for reference, disposable incomes in Dublin are 18% above the national average). Price inflation outside of Dublin was +5.6% y/y in April. As a sense check, the latest data from the Residential Tenancies Board show that rents are rising faster in Dublin than in any other region. So many tenants in the capital with aspirations to buy their own home are caught in a trap where their efforts to save a large enough deposit to meet the Central Bank rules are being frustrated by ever-increasing rents.
Elsewhere, the prospects for the non-residential property market here remain positive. In the Dublin office market, take-up was 1.4m sq ft in Q119, a strong-outturn that follows last year’s record annual take-up of 3.9m sq ft. Excluding reserved space, the Dublin office vacancy rate is at an all-time low of just 5.0%. This is likely to be a factor behind an uptick in activity in the regions. Per Lisney’s data, office take-up in Cork in the 12 months to end-Q119 was 444,011 sq ft, +230% y/y. Activity in the industrial and logistics segment has been helped by Brexit-influenced supply chain recalibrations. Dublin take-up was 922,535 sq ft in Q119 per JLL data, 46% ahead of the long-term average. While the retail sector in Ireland is not immune to the structural challenges that are present elsewhere, core (ex-auto) consumer spending is strong, with the cash value of core retail sales +4.2% y/y in Q119.
The latest Fiscal Monitor from the Department of Finance shows that while tax receipts have marginally undershot expectations in the year to date, this has been more than offset by lower spending, producing an underlying general government balance that is €0.2bn better than profile (target) for the opening five months of 2019. When this is set against the Budget Day projection of a general government deficit of €75m for FY19, it gives comfort to our view that the State is on course to run a second successive surplus this year. The recent slide in Eurozone Sovereign yields provides a very helpful tailwind for the Exchequer. Last week the NTMA raised 10 year funding at a yield of just 30bps, which compares to the blended rate on the stock of government debt of 2.4% (and the most expensive crisis-era debt is skewed towards the shorter end of Ireland’s curve), raising the prospect of material savings arising from the NTMA’s debt refinancing moves.
In terms of the risks to the economy, these are mostly external. Ireland is a hyper-globalised economy, with exports and imports summing to a remarkable 210% of GDP. Brexit, trade wars and shifting monetary policies all pose risks. The evidence thus far suggests that Ireland is navigating them as well as (if not better than) might have been hoped for. Data from Knight Frank show that Dublin has secured more Brexit relocations than any other city in Europe. Cork has won the same number of relocations as each of Barcelona and Munich (if only it had a soccer team to match…). While global trade flows are under pressure, the evidence shows that Ireland’s seaports have never been busier. A more dovish ECB is helpful for Ireland’s households (the fifth most indebted in the EU28, behind Denmark, Netherlands, Sweden and the UK) and the Sovereign (for the reasons set out above). Domestic risks generally fall into three headings: (i) The (lack of) housing crisis, which continues to rumble on; (ii) Competitiveness slippages arising from the limited slack in the economy; and (iii) Legacy issues arising from the credit bubble, which continue to reduce, although the rump of long-term mortgage arrears remains a challenge for policymakers 10 years on from the crash.
We have made a number of tweaks to our forecasts. We are more constructive on the outlook for consumer spending given the buoyant jobs data, but we have pulled back our investment forecasts (both housing completions and underlying business investment). Despite the strong year to date performance on the goods side, we have chosen to leave our expectations of modest export growth unchanged given concerns about the external environment. Bringing these together, we still see GDP advancing by 4.3% this year and by 3.4% (was 3.3%) in 2020, maintaining Ireland’s position as one of the best performing developed economies. (See below for the full report)
Hammond resignation threat
It has been reported overnight that the UK Chancellor of the Exchequer, Philip Hammond, has considered resigning his post in protest to PM May’s proposed spending (£27b on education in particular) plans ahead of her exit. Mr Hammond feels that Mrs. May should not be locking her successor into massive spending commitments in order to ensure she leaves the post with some shred of credibility attached to her legacy.
This news has put sterling under renewed pressure overnight, pushing the benchmark EUR/GBP rate to over five month highs. In other British political news, the second round of voting among MPs in the Conservative Party leadership contest takes place today between 3:00pm and 5:00pm, with the results due around 6:00pm. Of the original 10 candidates, 6 remain in the contest after 3 were eliminated in the first round and 1 withdrew.
In today’s vote, each candidate will need to secure the support of at least 10%, or 33, of Tory MPs in order to progress to the next round (scheduled for tomorrow). Note also that the remaining candidates will face off at 8:00pm tonight at a debate televised by the BBC, which frontrunner Boris Johnson has pledged to attend after forgoing a similar format hosted by Channel 4 on Sunday.
ECB Sintra forum
After yesterday’s ease-in, we have a jam packed day full of speaking engagements from the great and the good of the ECB at their annual Sintra forum. We kick off at 9am this morning with ECB President, Mario Draghi’s keynote speech. Much like (and styled on) the US Fed’s annual Jackson Hole symposium, these events often pass without any real drama but every now and then the Central Bank’s use these forums to signal a shift in their respective monetary policies. With the ECB being increasingly vocal in recent weeks about the potential for more stimulus due to the anaemic EZ inflation environment, this one will be worth watching. Following on from Mr. Draghi’s key note speech we are due to hear from the ECB’s Praet, Lane, Guindos and Coeure. Later this afternoon we will be treated to an open panel discussion with BoE Governor, Mark Carney, Mr. Draghi and Fed Vice-Chair, Richard Clarida.
Reserve Bank of Australia eyes further easing
In its latest policy minutes, the RBA noted that further easing in monetary policy is more likely in the period ahead. The bank said the spare capacity in the economy meant that stronger wage growth and increased inflation were still some way off and that further rate cuts from the current low of 1.25 per cent would be needed to stimulate the economy and employment. More policy easing could see the AUD remain under pressure and this dovish tone from the bank has seen the AUD drop to 15 year lows as a further rate cut is being priced in for around August.
10.00 EZ CPI
10.00 EZ ZEW Economic Sentiment
13.30 US Building Permits
15.00 UK BoE Gov Carney Speaks
15.00 EZ ECB President Draghi Speaks