03 Jul 2019

Irish Economy: Services PMI little changed in June

The latest AIB Ireland Services PMI indicates that activity was little changed in June, with the headline PMI coming in at 56.9 versus the previous month’s 57.0 reading. 

The sequence of growth for the Services sector now extends to 83 months, a welcomed record given that Monday’s Manufacturing release showed that activity in that sector has dropped below the 50 ‘no change’ line for the first time in six years. 


The Services report shows that inflows of New Business expanded markedly in June. Within that, New Export Orders rose at their fastest pace since the start of 2019, prompting firms to accelerate hiring to the strongest pace in three months. 


Margin developments appear to be neutral, with the rate of Input Cost Inflation dipping slightly from May, while there was a similar moderation in the rate of Output Charge Inflation. 


Encouragingly, Services firms remain very bullish on the sector’s prospects, with just under 41% of panellists predicting a rise in output over the coming year. 


The Composite PMI, released alongside today’s report, posted 54.4 in June, up from May’s 54.1 and signalling the fastest rise in business activity since February. That is good to see, although the narrative is one of a slight drag from manufacturing being more than offset by a buoyant Services sector. To be fair, Ireland’s manufacturers are hardly an outlier in experiencing trickier times during Q219, while the sector will have had a temporary boost due to the rush to build inventories by some UK customers ahead of the original end-March 2019 Brexit date, which produced a tough comparative in the second quarter.


Irish Economy: Exchequer comes in ahead of expectations in June

The final set of Exchequer Returns for H119, released after the market close yesterday, show a strong end to the period for the public finances. 


For the month of June, tax receipts of €5.0bn were €126m or 2.6% ahead of expectations. This outperformance has pared the year to date undershoot (in cash terms) in total tax receipts by half to €127m or 0.5% below profile. A closer examination of the tax data for June reveal a less impressive performance, as virtually all of the outperformance was due to the €174m beat on corporation tax (at €2.4bn, which compares to the €4.2bn from this heading in the opening six months of the year). 


On the spending side, total gross voted (discretionary) expenditures were €244m or 0.8% lower than profile (target), with outlays coming in below expectations on both the current (0.4% below) and capital (5.8% below) sides. Many departments are reporting material (double digit percentage) undershoots in capital expenditures, which may be due to funds being diverted from other areas to the likes of the National Children’s Hospital (capital expenditures in Health are 7.9% higher than profile), housing and education projects. 


Staying with spending, National Debt interest costs were €80m or 2.1% lower than profile in H119, helped by the favourable (from the issuers’ perspective) funding conditions. 


After adjusting for transactions with no general government impact, the underlying balance for H119 was €561m or 17.5% better than expectations at -€2.6bn. This outperformance compares favourably with Budget Day (October 2018) projections of a FY general government balance of -€75m. The more recent Stability Programme Update (April 2019) projection by the Department of Finance was for a FY19 balance of €610m, based on tax receipts growth of 4.8% and general government expenditure increasing by 4.1%. In H119 tax receipts were +6.9% y/y while we estimate that general government expenditures were +4.7% y/y, so the public finances look like they are tracking ahead of the SPU projection, although the lumpiness of the Corporation Tax heading is a risk factor as the Minister starts playing around with the figures for this October’s Budget. 

Irish Economy: Unemployment flat at 4.5% in June 

The latest Monthly Unemployment release from the CSO shows that the seasonally adjusted unemployment rate was steady at 4.5% in June, an increase of 300 in the seasonally adjusted number of persons unemployed in the month notwithstanding.


 Over the past 12 months the seasonally adjusted number of persons unemployed has fallen by 30,500, contributing to a 1.4pc fall in the unemployment rate over the same period. The headline unemployment rate peaked at 16.0% during the last recession, so the dramatic turn in labour market conditions since then is perhaps the most visible manifestation of Ireland’s economic strengthening. Total employment is currently growing at 1,600 a week. At 2.3m it is the highest since independence.


 During the Celtic Tiger years the unemployment rate troughed at 4.3%, implying that the current rate is synonymous with full employment. This has favourable implications for sectors exposed to the Irish consumer. 


Irish Banks: Ulster Bank’s Project Deenish sale of €900m in residential home loans

RBS’s Irish retail banking unit Ulster Bank yesterday opened the sales process for up to €900m in Irish residential mortgages, in a process that is likely to raise yet further media and political issues over the disposal of owner occupied mortgages in arrears to non-bank investment funds. 


As reported by the Irish media this morning and confirmed by Ulster Bank, the Project Deenish loan book will include 3,200 owner occupied home loans (with a nominal outstanding of c.€810m), and 400 buy-to-let mortgages (with a nominal outstanding of c.€90m), all of which are either in arrears or linked to a lending relationship that has loans in arrears. Ulster Bank’s figures show that the average owner-occupier arrears amount to c.€33,000 and 58 months behind with repayments, while BTL borrowers are on average 41 months behind and owe c.€36,000 in arrears. Cerberus purchased the €1.6bn Project Scariff portfolio disposed by Ulster Bank last year, and we would expect both Cerberus and the other usual US private equity names to be involved in the bidding on this portfolio as well. 


While we expect this particular disposal will not face any legislative barriers, it will likely raise the risk of eventual legislative action to limit the disposal of owner occupied mortgages going forward, with Sinn Fein having already initiated the process of bringing such legislation into parliament (though some time from being enacted). 

Bank of Ireland: ExCo changes announced

Bank of Ireland (BIRG) yesterday announced a series of changes to its Group Executive Committee (GEC), as the Group seeks to renew its focus on strategic priorities, particularly the delivery of the ongoing IT-led transformation programme. 


Mark Spain, Chief Strategy Officer, and who previously led some of the recent complex partnership negotiations for the UK business, has been appointed to the GEC and will report directly to CEO Francesca McDonagh, underpinning the Group’s focus on delivery of strategic priorities. Additionally, Steve Collier, who has been leading up the core banking platform changes, will shortly return to Australia on the completion of his current role, and all IT systems transformation will now be integrated into the Group Technology and Customer Solutions Division under the leadership of COO Jackie Noakes. Additionally, all aspects of the retail customer relationship will now be delivered via Retail Ireland CEO Gavin Kelly’s leadership, ensuring a more streamlined approach going forward. 


We see these changes as consistent with the transition of the Transformation Programme away from back-end core banking platform changes and infrastructure development, and towards the delivery of customer facing improvements including the much awaited delivery of the new mobile banking app (expected later this year). 


EU leaders agree top jobs

Yesterday’s EU Summit, the fourth in a run of somewhat fractious gatherings, decided on its nominations for the various top EU posts. As reported yesterday evening, German Defence Minister Ursula von der Leyen will be the new President of the EU Commission, replacing Jean-Claude Juncker in November. Meanwhile Donald Tusk’s role as EU Council President will go to Belgian PM Charles Michel. Possibly most significantly IMF Managing Director Christine Lagarde will replace Mario Draghi as ECB President. It is as yet unclear whether the ECB’s approach to monetary policy will change materially once Draghi departs in October. While Michel’s position as council president has been confirmed, both Lagarde and von der Leyen have further procedural hoops to jump through before being confirmed. Von der Leyen’s position will need to be endorsed by the European Parliament in a vote which is expected to take place today. Meanwhile Lagarde will only be confirmed after ratification by the European Parliament, the ECB’s Governing Council and EU finance ministers.


Carney talks Brexit, Rates, and Global Trade

Bank of England governor, Mark Carney was once again drawn into comments on Brexit and bank monetary policy at an event in Bournemouth yesterday. Speaking at a Local Government association event in Bournemouth, Carney acknowledged that traders were placing more weight on the possibility of a hard Brexit, and also suggesting that the BoE would be forced to cut rates. Carney maintained that higher rates would be required in the case of a smooth Brexit, a position that remains at odds with the dovish shift among most major central banks. The comments kicked off a slide in the pound which has seen both EUR/GBP and GBP/USD moving towards recent highs & lows respectively.  


OPEC agrees to extend its production cuts

The news had been leaked ahead of the eventual, much delayed, announcement, but OPEC and non-OPEC signatories to cuts, have agreed to extend their cuts through to 31 March 2020. This news has not excited oil markets. Brent was trading $65/b yesterday and has drifted lower this morning opening around $62.50 as OPEC has merely delivered on expectations. Now that OPEC+ production levels have determined for the time being, the focus for oil markets for the remainder of the year will now be on US production and inventories. Can US producers deliver substantial increases in production over the remainder of this year? Will northern hemisphere summer demand make significant inroads into inventories?


Economic Releases

09.00 EZ Markit Composite & Services PMI

09.30 UK Services PMI

11.00 UK BoE MPC Member Cunliffe Speaks

13.15 UK BoE MPC Member Broadbent Speaks

13.15 US ADP Nonfarm Employment

13.30 US Initial Jobless Claims

14.45 US Markit Composite & Services PMI

15.30 US ISM Non-Manufacturing PMI