06 Jun 2019

Irish Economy – Unemployment moves lower again

The latest data from the CSO show that the unemployment rate fell 20bps m/m to 4.4% in May, the lowest rate in the economy since 2006. 


On a seasonally-adjusted basis, the number of unemployed people decreased by 3,100 in the month to 108,200 – a number that has declined by almost one-quarter in the past year. Should this rate of reduction be sustained, it will be just a few months before the unemployment total falls below 100,000 for the first time since 2005.


The improvement indicated by these data follows a positive Labour Force Survey released two weeks ago which showed that total employment in the economy rose by 3.7% y/y in Q119 and that all NUTS2 and NUTS3 geographical regions posted an increase in employment in the period. Other recent data showed that average weekly earnings in the economy increased by 3.4% y/y in Q119, further emphasising the buoyant labour market conditions at present.


Irish Economy – Exchequer in balance YTD

Exchequer Returns for May, released by the Department of Finance late yesterday, show a positive performance from most of the main tax heads in the month, although Corporation Tax underperformed.


While both Income Tax and VAT receipts bounced back in May following a lacklustre April, lower than expected Corporation Tax receipts weighed on overall tax collection totals both in the month and the year to date. Income Tax receipts of €1.76bn in May were 7.1% above profile (target) and the YTD underperformance in this category has been reduced to a modest -0.6%, and despite a 7.9% y/y increase in the first five months. Similarly, VAT receipts were above target in the month, but -1.5% versus profile in first five months and +5.7% y/y in the same period. Corporation Tax was 22.5% (€0.39bn) below profile in May, and this underperformance accounted for the entire tax revenue undershoot in both the month (€0.23bn) and the YTD (€0.25bn), but this tax head is notably “lumpy” in nature and we note that June is a more significant month for this revenue category.


On the spending side, gross voted (discretionary) expenditures were +8.2% y/y, reflecting higher current (+6.7% y/y) and capital (+31.8% y/y) spending, but modestly behind budget at this stage of the year.


The Exchequer was effectively in balance in the first five months of the year (a deficit of €62m to be precise) and we continue to expect that the State will run a second successive surplus in 2019.


Aryzta: Need to look through quarterly volatility

Price volatility on quarterly numbers is not unexpected for any company in the early stages of recovery. We believe, however, that the longer-term plans are a better guide to sustainable price appreciation. As such, we believe that Aryzta’s management is implementing a recovery programme that will deliver in the mid-term.


Despite our minimal 0.4% pull back in FY19E revenue forecast to €3.42bn and 76bps contraction in EBITDA margin assumption to 8.8%, the combined impact drives an 8.3% dip in our forecast EBITDA to €300.0m. Given the relatively large and unchanged net interest charge, a lower forecast EBITDA translates into a 23.2% fall in our adj. EPS forecast to 9.7c. While this appears to be a large adjustment it is the law of small numbers where minimal changes in absolute terms translate into significant relative moves.


The two key issues in the Q319A IMS were the higher than expected fall in North American volumes, which impacts revenue assumptions and revised EBITDA guidance, suggesting more margin pressure than previously anticipated. On volumes, management noted that while the market is challenging, particularly for its retail and food services clients, QoQ volatility can be high and not too much should be read into one number. No key clients or business have been lost. On EBITDA guidance, management cited a longer time required to stabilise the North American business and slower than expected rollout of Project Renew, which is now back on track.


ECB preview

Today we will see June’s ECB Governing Council (GC) meeting being hosted by the Lithuanian central bank, in Vilnius. We are not anticipating any major changes in policy, with the key ECB interest rates expected to be held at -0.40% (deposit rate), 0.00% (main refinancing rate), +0.25% (marginal lending rate). QE reinvestment policy and ECB guidance that interest rates are expected to remain at their current levels “at least through the end of 2019” should also remain unchanged. As usual the rates decision is due at 12:45 (Irish time) and the President’s press conference at 13:30.


The language of today’s meeting is however set to be an important one and one which could set the tone for the period ahead, given that the GC will be armed with a new set of Eurosystem macroeconomic projections. The last (March) set of projections witnessed a hefty downgrade to Eurozone growth, which in 2019 is forecast at 1.1% (previously 1.7%), however the baseline still envisaged a recovery through H2. The key question is whether this view still stands or whether the continued mixed data picture and persistent trade headwinds lead to a further downgrade, with potential consequences for the policy stance.


US/Mexican tariffs

The Mexican and US authorities spoke on the latest row over immigration, where the US has threatened to impose tariffs on Mexican imports, beginning with a 5% levy on Monday 10 June. While Mexico sounded optimistic, this did not seem to be mutual. President Trump, who of course is currently in Europe, stated that there was ‘not nearly enough’ progress. Discussions continue today. A realistic expectation is that meetings spill over into next week, with the Mexican authorities having prepared a list of retaliatory tariffs of their own. Meanwhile Mexico underwent two credit downgrades overnight - Fitch lowered Mexico’s rating to BBB, while Moody’s cut its outlook to negative from stable (rating A3). Both agencies cited the deteriorating macro outlook as a factor.



Italy gets an EU wrist slapping

Yesterday the European Commission (EC) published its Spring Package, which outlines its country specific recommendations with regard to fiscal matters. The main takeaway here is that the EC concluded that an Excessive Deficit Procedure (EDP) for Italy was warranted given its debt position.  At this point the EDP is still only a recommendation as it still needs to be signed off by EU leaders (20-21 European Council), before formal approval  by Ecofin, possibly coming at the 8/9 July Ecofin meeting. Italian markets weakened with the FTSE MIB down 0.8% and 10-year BTP yields 8bp higher (2.6%) against a broad fall in European government bond yields yesterday.


Economic Releases

10.00 EZ GDP
12.45 EZ ECB Interest Rate Decision
13.30 US Nonfarm Productivity
13.30 EZ ECB Press Conference
13.40 FOMC member Kaplan speaks