05 Nov 2019

Irish Economy: Services PMI falls to 7-year low

The AIB Ireland Services PMI dipped sharply in October to its lowest level in more than seven years. This was a disappointing outturn given the upturn in the Manufacturing PMI published last Friday.

The headline PMI fell to 50.6 in October from 53.1 in September, in what was the fifth successive monthly decline in the index and the lowest reading since August 2012. For reference, the index averaged 58.0 in 2018 and was as at 57.0 as recently as May. In terms of the main sub-indices, there was a similar weakening evident in new business activity, with just a small increase being recorded in October. It was not all doom and gloom however. There was a return to growth in new business from abroad and the rate of job creation in the sector was the fastest in four months. Business confidence also increased during October, to a three-month high, although the level of optimism was subdued overall and September’s reading marked an eight-year low. Amongst the four sub-sectors, business activity in Transport & Leisure firms declined in October but increased robustly in Financial Services enterprises. Activity in Business Services and TMT sub-sectors was close to unchanged.

There has been hope that difficult conditions in the manufacturing industry would not spread to the services sector, both globally and in the domestic economy. Although this morning’s report is not encouraging from an Irish perspective, we note that responses to the survey were collected between October 11th and 28th and, as such, Brexit may well have been casting a dark shadow over panellists’ keyboards as they pondered their responses.

Irish Economy: Solid performances on both sides of public ledger

The latest Fiscal Monitor from the Department of Finance shows a solid month for tax collection in October with higher than expected Corporation Tax receipts making up for modest shortfalls elsewhere. 

Total tax revenues of €4.19bn in October were 0.8% (€31m) ahead of profile (target), with the YTD outperformance moderating slightly to 1.6%. Strong Corporation Tax receipts are again a feature of the data and were almost 11% (€102m) above profile in the month. On the other hand, both VAT receipts and Income Tax were behind profile, but Income Tax only marginally so and these combined underperformances were less than the Corporation Tax outperformance. Variations from profile were only small amongst the other tax heads. In the YTD, (again) Corporation Tax outperformance is the most notable feature with more than 90% of the aggregate €706m outperformance arising in this head. Otherwise, total receipts are close to target with Excise Duties and CGT higher than forecast offsetting lower VAT and Stamp Duties.

On the expenditure side, total gross voted spending was 0.9% (€501m) below expectations in the year to October with an underspend evident in both current and capital budgets and in almost all vote groups. However it is not uncommon for spending to “catch up” in the last couple of months of the year.

All in all, the public finances remain firmly on track for this year.

Irish Economy: Consumer sentiment falls for the fourth time

The KBC Consumer Sentiment Index fell again in October, declining to 69.5 from 75.3 in the previous month. 

This was the fourth successive monthly decline in the index and the lowest outturn since August 2013. However, as with the Services PMI (see above), the survey responses were collected in mid-October and likely reflect prevailing Brexit uncertainties at that time. Four of the five components of the index weakened in October with the most pronounced weakness in those areas relating to household finances and spending. The exception being an effectively unchanged assessment of the jobs market – unsurprising given that all the labour market data point to continued robust growth in this area.

Although we have seen a significant drop in consumer sentiment in recent months, it is worth noting that this negativity is not reflected in other domestic macro indicators – retail sales volumes increasing by 4.2% y/y in September being the latest example. Now that the issue of Brexit has been temporarily shelved pending the UK general election, we could well see a rebound in sentiment over the next couple of months (only for renewed uncertainty to hit again as we get closer to the latest Brexit deadline in January).

China cuts rates

Overnight the People’s Bank of China (PBoC) announced a 5bp cut in the Medium Term Lending facility taking the rate down to 3.25%, making it the first reduction in the rate since February 2016. The knock on effect is that it should also influence the newly reformed Loan Prime rate, which is now used as a benchmark for lending to the private sector.  That rate currently stands at 4.2%, but in all likelihood will fall when it is set on the 20 November. Whilst the PBoC did not provide any rationale for the cut, it would appear it is in response to economic headwinds and to ensure that GDP growth in Q4 does not fall below the bottom of the government’s growth target of 6-6.5% (Q3 GDP growth was recorded at 6.0%). 

Trade positivity

Meanwhile, reports overnight suggest that there are discussions within the White House over rolling back some of the latest US tariffs on Chinese goods, addressing a key sticking point for the Chinese government. In particular there are talks over removing the 15% tariff on $112bn of Chinese imports that was introduced on the 1 September, whilst talks over abandoning the delayed (to 15 December) 15% increase on $156bn of Chinese goods are also reportedly taking place. Any decision on these tariffs would likely be a key milestone in reaching a so called ‘phase 1’ agreement, which US officials are hoping to tie up later this month, although the US will likely want some concessions from the Chinese. 

The three major US equity indices all closed at (S&P, & Nasdaq) or very close to (Dow Jones) all-time highs last night on the back of the positive trade news. Asian markets have taken the rate cut and the trade chatter as positive news also, with the Shanghai composite rising 0.5% and the wider MSCI Asia index is up 0.7%. 

UK retail sales beat expectations

The October report painted a slightly better picture of retail sales than over recent months. On a total basis, sales were 0.6% up on year-ago levels in October, whilst adjusting for developments in floor space, sales were effectively flat on the year. Despite the improvement in October, the tone of the report is still downbeat with the 12-month average growth pace falling to a new low of 0.1%. The BRC pointed to as an “extraordinary period of discounting” this October as retailers sought to bring shoppers in to make purchases. Although the BRC report continues to paint a subdued retail picture, it is worth pointing out that not all reports (covering different retailer mixes) present the same scenario and indeed the Office for National Statistics figures have been more resilient over the year so far. On a volumes basis, they showed sales (ex-fuel purchases) up 3.0% year-over-year in September.

RBA rate decision

The Reserve Bank of Australia (RBA) held the cash rate steady at 0.75% at its monetary policy meeting this morning, opting against a fourth cut this year. Governor Lowe did leave the door open to further stimulus, should it be required. The RBA did however lower its growth forecasts for 2019 from 2½% to 2¼%, citing the US-China trade dispute fuelling uncertainty in the industrial climate. There was a slight move in the Aussie dollar after the decision, which firmed from $0.6885, now trading at $0.6909.

Economic Releases

UK 09.30 Services PMI

EU 10.00 PPI

US 14.45 Services PMI

US 15.00 ISM non-manufacturing index