Latest Economics Commentary from Simon Barry and His Team at Ulster Bank

SIMON-AND-RICARDO

Highlights from this week's commentary on the economy and financial markets from Ulster Bank Economics team Simon Barry and Ricardo Amaro.


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Ireland: Trends in tax receipts and jobless figures offer encouragement, though survey indicators argue for some caution

Following on from the positive start to the year for retail sales we noted last week, this week’s data flow has brought further encouragement on early-year trends in the Irish economy. Notably, the latest Exchequer Returns show the State’s revenues on a solid footing, with tax receipts up 7.1% y/y in the first quarter.

In contrast to recent years, the annual uplift is not being heavily influenced by Corporation Tax receipts as these were actually down a modest 1.6% y/y, though this is still best seen as a strong performance given last year’s exceptionally rapid 28% growth. Rather, with ex-Corporation tax receipts up 7.5%, it reflects buoyancy in the two biggest categories of Income Tax and VAT, both of which are up +6.5% so far this year, while Excise duties are off to a particularly strong start to the year, up over 11%. The health of VAT receipts chimes well with the signals from the retail sales figures, while the still-solid gains in Income tax revenues are consistent with ongoing improvement in the labour market.

Indeed, provisional figures for March put the jobless rate at a new 11-year low of 5.4%, down from the latest official estimate of 5.7% for Q4 and from 5.8% a year earlier. The latest readings of some prominent survey indicators argue for some caution, however. The composite PMI and the KBC measure of consumer confidence have both edged up from their recent Jan/Feb lows. However, their respective 3-month averages continued to decline in March to stand at multi-year lows, thus highlighting the enduring downside risk to the outlook associated with Brexit-related uncertainty.

 

Eurozone: Domestic demand shows resilience, but trends in manufacturing continue to disappoint

This week’s account of the March ECB Governing Council (GC) meeting confirmed that ECB officials gave some consideration to signalling that interest rates are expected to remain on hold through March 2020, with some members arguing that “a clear easing signal would be important in view of the significant downward revisions to the ECB staff projections”. But the GC ended up agreeing that extending its guidance until the end of 2019 was more consistent with its growth projections which anticipate a gradual pick-up in growth in H2 ’19.

However, the minutes also indicated that the GC stands ready to readjust monetary policy should the outlook evolve less favourably than the ECB expects. In that regard, this week’s economic data provided evidence that domestic demand continues to show resilience. Indeed, final figures for March brought an upward revision to the Eurozone Services PMI, leaving this important barometer of service sector activity growth pointing to a further slight pick-up of growth momentum at the end of Q1. February retail sales figures also left consumer spending trends looking healthy so far in Q1.

Finally, German industrial production (IP) figures also showed unexpected strength, with output rising by 0.7% m/m in February, while the January reading was also upwardly revised. But the details highlighted that total production was boosted by a surge in construction, while manufacturing remained on a weak footing. So today’s IP numbers confirm that German growth is likely to rebound in Q1, but trends in manufacturing leave us cautious on near-term growth prospects.


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UK: Services activity slides into contraction territory in March

The March PMI surveys provided the latest evidence that Brexit uncertainty is increasingly impacting the UK economy. Following 51.4 in February, the all-sector PMI fell to the 50 no-change benchmark in March indicating that activity growth stalled at the end of Q1 as the key services sector dipped into contraction territory for the 1st time since July 2016.

This more than offset faster growth in manufacturing, with activity in the factory sector boosted by a further step-up stock building, linked to contingency planning for a disorderly Brexit. This also means that the all-sector PMI for Q1 as a whole recorded its weakest quarterly performance since Q4 2012. The Q1 average of 50.6 is at levels which have historically been consistent with very subdued q/q GDP growth of ca. 0.1%, below the BoE’s expectation of 0.3%.

Moreover, forward-looking indicators aren't pointing to any near-term improvement. New business recorded a 3rd decline in a row in March, representing the longest sequence of falling sales volumes since 2009, while Brexit concerns continue to weigh on business sentiment. Overall, this week’s PMI results raise concerns that further deterioration in private sector activity may be on the cards in the months ahead, particularly if UK business sector concerns about Brexit risks and uncertainties don’t ease. 

 

US: February retail sales disappoint but solid income trends argue against writing off the US consumer

This week’s US retail sales report revealed that February sales were well below expectations, with headline and core measures alike all registering unexpected monthly declines. Notably, the ‘control group’ measure (which feeds directly into the GDP estimate of consumer spending) recorded a 0.2% drop in sales against expectations for it to rise by 0.3%. While a disappointing outcome, especially given the context of the market’s current narrative around the US being late-cycle, we are not overly troubled by this week’s figures, for two reasons.

First, the downside surprise in the February outcome was significantly mitigated by a major upward revision to the January data which, for the control group, were revised from +1.1% to +1.7% m/m.

Second, the continued health of trends in household income growth argues against presuming that we have entered a protracted period of marked weakness in household spending. In particular, we note that the latest figures show aggregate income growth at 4.5%y/y in the three months to February – very steady at and fully in line with the run-rate seen over the past two years.

There is no doubting that the very weak end to last year coupled with the disappointing February figures creates a strong statistical headwind for overall q/q consumer spending growth in Q1 which may now struggle to stay in positive territory. However, the still-solid trends in income growth - a key driver of household expenditure in any economy – suggest that US consumer spending growth is well-positioned to re-accelerate in Q2.

 

Financial Markets: May’s shift to a cross-party approach a constructive development

PM’s May shift to a cross-party approach represents both a major change of tack and, most importantly, a significant step forward in the context of her attempts to secure a constructive Brexit outcome. The delayed and belated timing of the shift notwithstanding, early reports suggest that the engagements have been constructive.

Furthermore, the UK Parliament has this week taken further steps to avoid a no-deal outcome, again underlining its opposition to such a scenario. However, as noted by BoE Governor Carney this week, it’s all very well to say that the UK Parliament, the UK Government and the EU are all against a no-deal scenario when the reality remains that, as things stand, leaving the EU without an agreement has become the default outcome in the event that a deal has not been formally agreed by next week. Thus, a crash-out could happen by accident given how tight are the timelines, with Carney characterising the risk of no-deal as “alarmingly high”. The other way to avoid next week’s cliff date is of course to agree another extension, with PM May earlier today requesting an extension to the end of June. EU leaders may need to be convinced about the credibility of the UK’s plan, though ultimately we think they will facilitate some form of extension.

The pound is little changed on the week despite all of this noise and we continue to think there likely is upside ahead for sterling in the event a deal gets done. However, very elevated levels of political risk imply sterling would face potentially sizeable downside if the politics go horribly wrong. 


Recommended reading: How Prepared Are Firms to Deal With a Post-Brexit Scenario?


Highlights for the week ahead: Irish sector accounts, Brexit and ECB meeting in focus

An important week ahead on the Irish economic calendar includes the Institutional Sector Accounts (on Thursday). As usual, nominal household income growth will be a particular point of interest for us and we wouldn’t be surprised to see a pick-up in growth from a solid 5% y/y in Q3 following very favourable wage developments in Q4.

Thursday’s HICP figures for March are also expected to highlight that the household sector continues to benefit from subdued inflation, further underpinning growth in real spending power. Also on Thursday, we think that the annual rate of national house price inflation is likely to have eased for a 10th month in a row in February following 5.6% in January. Domestic construction will also be in focus, with Monday’s release of the March results of the Ulster Bank Construction PMI.

Away from home, another key week on Brexit includes an extraordinary European Council summit (on Wednesday), which will include the response from EU-27 leaders to PM May’s request for a 2nd extension of the Brexit deadline (currently scheduled for next Friday).

Also on Wednesday, the April policy meeting from the ECB is widely expected to result in unchanged monetary policy settings and guidance. On the economy, we think that Draghi will reiterate that March’s assessment remains broadly intact. Finally, the Fed minutes of the March policy meeting will provide further context to the Fed’s changed interest rate guidance for 2019 (the median ‘dot’ now points to no hikes this year, down from 1 before the March meeting), while the March US CPI figures are expected to show that core inflation remains steady.


Disclaimer

The Ulster Bank Weekly Economic Commentary download is intended for clients or potential clients of Ulster Bank Limited and Ulster Bank Ireland DAC (together and separately, "Ulster Bank") and is not intended for any other person. It does not constitute an offer or invitation to purchase or sell any instrument or to provide any service in any jurisdiction where the required authorisation is not held. Ulster Bank and/or its associates and/or its employees may have a position or engage in transactions in any instruments mentioned.

The information including any opinions expressed is indicative and may constitute our judgement at time of publication and are subject to change without notice. The information contained herein should not be construed as advice, and is not intended to be construed as such.

This publication provides only a brief review of the complex issues discussed and recipients should not rely on information contained here without seeking specific advice on matters that concern them. Ulster Bank make no representations or warranties with respect to the information and disclaim all liability for use the recipient or their advisors make of the information.


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