05 Mar 2019

Irish Economy: Services PMI shows an improved performance in February

The latest AIB Ireland Services PMI release shows that the rate of activity in the sector picked up in February, helped by an expansion in New Orders.

The headline Business Activity index posted 55.9 for last month, up from January’s 54.2 reading. The uptick in demand appears to have been driven more by domestic customers, as the New Export Orders index moderated to the weakest in the current 27 month sequence of expansion.


Given the backdrop of Brexit uncertainty, it is not a particular surprise to see that Sentiment among Irish service providers regarding year-ahead activity has weakened to its lowest since May 2013. In turn, this presumably fed into another moderation in Employment growth (to the slowest since March 2018). On the margin side, both input prices and output charges increased at quicker rates during February.


Taken together with the Manufacturing PMI release, it seems that activity across much of Ireland’s private sector improved in February following a relatively (by recent Irish standards) soft January. Indeed, the Composite PMI posted 55.4 in February, up from 53.3 at the start of the year. Whether this is the start of an improving trend (or not) will largely be driven by political developments in Ireland’s next door neighbour (see Exchequer comment below in this note).


Irish Economy: Exchequer surplus of €139m in the first two months of the year


Exchequer Returns released by the Department of Finance (DoF) after the market close yesterday show that a surplus of €139m was recorded in the opening two months of 2019.


Year-to-date tax revenues of €8.1bn are +3.7% y/y and effectively in-line (just 60bps or €50m behind) the DoF's profile (target). The two largest tax headings, income tax and VAT, were each 4-5% behind profile, which the DoF explains away as being due to some late payments and higher than expected repayments respectively. Nonetheless, both headings are more than 4% ahead of year-earlier levels. The star performer where tax revenue is concerned is corporation tax, where revenues of €170m were €194m ahead of profile (i.e. the DoF had projected net repayments in the opening period of 2019).


Turning to spending, gross voted (discretionary) expenditures were €141m or 1.4% lower than profile in the opening months of the year, with current spending 60bps below expectations and capital expenditures 14.0% lower than profile. National debt interest costs, at €415m, were €14m lower than profile.


Bringing it all together, the underlying balance was €131m better than expected at a deficit of €1.1bn. FEOGA Intervention payments, a €225m IBRC dividend and intra-government loan transactions, all of which sit outside the General Government sector, produced the headline Exchequer surplus.


It is too early in the year to make definitive judgments on the Exchequer performance, but few would quibble with a backdrop of effectively in-line revenues and lower than expected spending. Furthermore, as we have said before, events in Westminster will likely be pivotal in determining overall Irish economic growth (and, by extension, the performance of the public finances) in 2019. So, overall, a good start to the year but watch this space.


PTSB: Repaired, but not yet recovered


We have a new report out on PTSB this morning post-FY18 results rom last week.  


FY18 exhibited a strong underlying performance in-line with an admittedly sparse consensus), as we note significant progress on volume growth (including a residential mortgage market share of 15.1%), NPE eduction (Glas and Glenbeigh disposals now bringing NPEs below 10% of gross loans) and cost efficiencies, while margins remain well marshalled (NIM 178bps). However, some sizeable exceptional costs (€91m total, 94% of pre-tax profitability) on NPE disposals (€66m) and tracker mortgage (€20m) issues highlight the continued overhang of legacy problems, while there is now also limited flexibility on capital (FLCET1 12.2% though pro forma 14.0% assuming approval for capital treatment of NPE disposals). Further, income will rebase significantly lower this year (FY18 €442m vs FY19E €391m) after the NPE disposals executed last year. With digital investment finally being addressed (€100m over next four years, 80% of this capitalised), there is only modest scope for near term earnings expansion.


We note the commercial progress being made and the de-risking of legacy asset quality issues, but cost reduction will prove difficult amid ongoing investment needs and rising wages, while income generation rebases lower after last year’s NPL disposals. The past is de-risked, but the future remains challenging. We forecast FY21E ROaTE of 4.5%, and model a 6% return beyond this given high IR sensitivity and potential for policy rate normalisation. If you haven’t already received a copy of the report, please contact the Sales desk.


NPC kicks off


Today marked the opening of the second annual session of the 13th National People’s Congress. In his address to delegates, Chinese Premier Li Keqiang confirmed reports that Beijing would target growth of between 6.0-6.5% in 2019, down from the 6.5% targeted in both 2017 and 2018. In his speech he said that China must be “fully prepared for a tough struggle” as the country faces a “grave and more complicated environment”. Furthermore, the Ministry of Finance announced that VAT for manufacturing firms was being slashed from 16% to 13%, while that for the transportation and construction sectors will be lowered from 10% to 9%. Alongside other measures unveiled to shore up growth, this has seen the yuan firm to 6.7011 and the Shanghai Composite advance 0.9%. It’s also worth noting that the remaining Chinese Caixin PMI’s were released earlier this morning. The services PMI slowed to 51.1 from last month’s 53.5 and the overall composite also dropped to 50.7 versus 50.9 at the last reading, disappointing all round.


UK Services PMI data due


The UK Services PMI fell from 51.2 to 50.1 in January. This left the index at a two-and-a-half-year low and perilously close to the breakeven level of 50. Business Activity was dampened by the first fall in New Orders since July 2016, with survey respondents “overwhelmingly” linking the slowdown to the current political uncertainty. Against this backdrop, firms were more cautious in their hiring intentions and chose not to replace voluntary departures, resulting in the first fall in Employment since October 2012. Our expectation that the intensification of Brexit uncertainties just over three weeks before the UK is set to leave the EU will have further weighed on New Orders in February. This, in turn, should further drag on business activity, to the extent that we expect business activity to marginally dip into contraction territory to 49.8 in February


British Retail onsortium (BRC) retail sales figures – February


The figures presented a downbeat assessment of the consumer backdrop, with the data showing lacklustre spending with a focus on essential items rather than more discretionary spending. On a total basis, sales in value terms were 0.5% higher n February, down from January’s 2.2% whilst adjusting for floorspace sales ere 0.1% down on levels a year ago, after January’s 1.8% reading. The figures are particularly disappointing when considered against a backdrop where real household spending power has improved over recent months amidst a fall in inflation and rise in pay growth. The BRC highlighted the “uncertainty surrounding he UK’s imminent exit from the European Union” as the key factor. Also adding to the picture of the subdued consumer backdrop were the Barclaycard spending figures, where its broader measure of consumer spending rose by just 1.2%, the weakest increase since the company began recording card spending in 2015.


Economic releases


09.00 EZ Markit Composite PMI

09.00 EZ Services PMI

09.30 UK Services PMI

10.00 EZ Retail Sales

14.30 US FOMC member Kashkari

15.00 US ISM Non-Manufacturing PMI

15.00 US New Home Sales