Investec Irish Economy Monitor Q2 2017 shows Employment at 9 year High

An examination of the key data points across the Irish economy reveals a strong start to the year. Exports have been a key highlight, with nominal goods exports +10% y/y in the year to date. On the domestic side of the economy, while headline retail sales growth has moderated, core (ex-motor) sales still show good momentum. Housing completions were +24% y/y in Q1. That’s according to the Investec Irish Economy Monitor Q2 2017.

Philip O’Sullivan, Economics & Financials Research, Investec

The public finances had a mixed start to 2017, but the latest data suggest that they could be about to get back on track. Ahead of the release of Q1 national accounts Investec keeps its headline forecasts (GDP +4.6% in 2017 and +4.0% in 2018) unchanged.

To start with the external sector, helped by the aforementioned growth in merchandise exports, the year to date trade surplus has expanded by 18% to €17.1bn. All nine major commodity groups have posted annual growth in nominal exports in the period to end-April. With six successive above-50 readings, the export component of the Investec Services PMI report for Ireland suggests the good momentum here should also continue. The progress across the export sector is particularly encouraging given some adverse currency movements (particularly sterling).

A host of economic data show a favourable backdrop for the Irish consumer. Unemployment is at a nine year low of 6.4%, while total employment is back to within 5% of the all-time peak. In Q4 2016 aggregate disposable incomes eclipsed the previous peak set back in Q408, while the ratio of household debt to disposable incomes has fallen from a high of 213.9% in Q409 to 140.9% (its lowest since Q204) currently. Household net worth has increased for 15 successive quarters, with the cumulative recovery from the trough now standing at €221bn (+51%). Despite the stronger personal finances, recent headline retail sales data have been mixed, with annual declines (in value terms) posted in two of the past three months for which we have data (to end-April) – before this recent weakness, the last annual decline on this measure was recorded in October 2013. A deep dive of CSO data reveals that most of the weakness is down to tepid new car sales (-10% y/y in the year to date), with most other areas recording healthy growth (ex-motor retail sales were +3.4% y/y in value terms in April). The decline in new car sales is down to competition from sterling dealers, with imports of used cars +50% y/y in the year to date.

On the property side, Investec notes a welcome increase in housing output (completions +24% y/y) in Q1, while planning permissions data (a lead indicator for completions) show growth of 39% y/y to 17,394 units on a four-quarter-moving-sum basis to end-Q117. Despite this improvement, Investec expects the mismatch between supply and demand to endure until the end of the decade at least. Following strong residential property price growth since the start of the year, it is today increasing forecasts for house price inflation by 100bps for each of 2017 (to +7%) and 2018 (+6%). Turning to non-residential property, it notes growing evidence of a ‘Brexit dividend’ for the Irish office sector, while industrial is also well-placed to benefit from a recalibration of supply chains.

Exchequer Returns show a mixed start to the year, but a strong performance in May has brought cumulative tax receipts back to within 1.4% of target. That, combined with an undershoot on the expenditure side and positive overall outlook, gives reassurance that the public finances can meet Budget Day targets. In any event, given that the Investec forecast is for a deficit equivalent to just 0.1% of GDP in 2017, any ‘miss’ would likely be very modest in absolute terms. There has been better news for the Exchequer in terms of asset sales, with the AIB IPO successfully executed earlier this month. NAMA recently upped its lifetime profit guidance to €3bn, finally catching up with the forecast Investec made back in October 2015. However, Investec’s research suggest that this is too low, given: (i) NAMA’s core equity (shareholders’ funds minus minorities and subordinated instruments) is already just north of €3bn; (ii) Following the FY16 impairment exercise it has an unrecognised surplus of €469m which, if maintained (as Investec believes it will be), will be recognised as profit over its remaining life; and (iii) Investec believe that NAMA will generate additional attractive surpluses from its investment programme. Given the above, it now believe that NAMA will deliver a surplus of €4bn to the Exchequer.

As mentioned above, Investec has made some minor tweaks to its estimates, it has left the headline forecasts of GDP growth of 4.6% this year and 4.0% in 2017 unchanged ahead of the release of Q117 national accounts data. All in all, the Irish economy continues to show good momentum, with any concerns about FX-related pressure on ‘big ticket items’ offset by a buoyant export performance. For more on the above, please see Investec’s Q217 Irish Economy Monitor.

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