Fed poised to get in first with rate cut despite market risks
The Federal Reserve looks poised to beat the European Central Bank out of the blocks with a rate cut that looks set for its next meeting on July 31.
Its chairman, Jerome Powell, will have the chance to push the message home tomorrow to a European audience when he speaks in Paris.
This comes after his comments last week in which he indicated a cut was on the way, pushed by the yield curve on US Treasuries to their steepest levels in over three years, an indication the market believed a cut was coming and that the Fed would be able stabilise economic output in the world’s largest economy.
There are, however, risks, given the aggressive markets, according to a report from the Washington-based Institute of International Finance, the most influential banking grouping in the world.
“However, substantial monetary policy support is well priced in: it has been a major factor pushing the market value of negative-yielding bonds above $13tn (€11.5tn) and in this year’s re-rating of global equities,” it warned.
Ireland at full employment as jobless rate unchanged.
THE country is at full employment as just 4.5pc of the workforce are out of work.
The seasonally adjusted unemployment rate for June was 4.5pc, unchanged on the prior month.
However, it was down 1.9pc when compared to a year earlier, according to figures from the Central Statistics Office (CSO).
The seasonally adjusted number of people unemployed was 109,700 last month.
When compared to June 2018, there was a decrease of 30,500 in the seasonally adjusted number of people unemployed.
Pawel Adrjan, economist at global job site Indeed, said: “Whilst the downward trajectory of the rate of unemployment paused for breath in June, the employment story in Ireland remains extremely positive.”
However Mr Adrjan warned that the threat of a no-deal Brexit could prove to be a “fly in the ointment of the overwhelmingly positive Irish employment story.”
“The Government has warned that 55,000 jobs could be lost in the first two years of a disorderly Brexit, and as many as 85,000 jobs over the longer term.”
“This stark warning is a reminder that the downward trajectory for unemployment that Ireland has experienced could be reversed by external events largely beyond Ireland’s control,” he added.
For males, the unemployment rate was 4.7pc last month, remaining unchanged from May 2019, and down from 6pc in June 2018.
For women, the unemployment rate was 4.3pc last month compared to 4.2pc in May, and down from 5.7pc in June 2018.
Meanwhile, the unemployment rate among young people, that is those aged 15-24, increased marginally last month to 10.1pc from 10pc in May.
Government surplus of €50m in 2018, new CSO figures show
The Government surplus stood at €50m in 2018, new figures from the Central Statistics Office show today.
This represents 0.01% of GDP and compares to a deficit of €83m in 2017, or 28% of GDP.
The CSO said that Government revenues increased by 7.2% to €82 billion last year with government expenditures increasing by 6% to €82 billion.
The main driver of the increase in Government revenues was an 8.2% rise in taxes. Social contributions also rose by 5.8%, while sales of goods and services increased by 5.9%.
But the CSO said that investment income decreased markedly – with a fall of 26.8% – between 2017 and 2018.
On the expenditure side, the CSO noted pay increases of 7.5%, while social benefits rose by 2.5% and use of goods and services grew by 10%.
Debt services costs, or interest, decreased by €0.57 billion, or 9.9%, the CSO added.
Central government collected €78 billion, or 95%, of total revenue in 2018, today’s figures also show.
The rest was generated by local government in the form of commercial rates, social housing rents and other capital transfers.
In a separate set of figures, the CSO said the Government recorded a deficit of €1.8 billion (2.2% of quarterly GDP) in the first quarter of 2019.
Government revenue amounted to €18.7 billion in the first three months of the year, up from €17.8 billion the same time last year, and on the back of a 6.6% increase taxes and social contributions.
Government expenditure for the three month period rose by 4.8% to €20.5 billion.
The CSO said the rise was mainly due to higher wage bills, which rose by 4.8%, while use of goods and services was up 5.3% and social benefits increased by 3.5%.
Disorderly Brexit biggest risk to financial stability – Central Bank
A new review from the Central Bank shows that the main risk to the country’s financial stability and the wider economy is a larger than expected macroeconomic shock in a case of a disorderly Brexit.
As well as Brexit, the other risks to the financial sector are related to external developments and include a sudden tightening in global financial conditions and a re-emergence of sovereign debt sustainability concerns in the euro zone.
Domestic risks facing the financial sector include an abrupt fall in Irish property prices and banks’ profitability as well as the possibility of elevated risk-taking behaviour in the banking sector.
The Central Bank’s first Financial Stability Review outlines key risks facing the financial system and assesses the resilience of the economy and financial system to adverse shocks.
It is not aimed at providing an economic forecast, but instead focuses on the potential for negative outcomes to materialise.
The Central Bank cautioned today that the risks to the country’s financial stability have increased slightly over the last six months and some of the possible triggers have now become more imminent.
It noted that global growth prospects have been downgraded and the trade row between the US and China has created increased uncertainty about global trade deals.
A key lesson from the last crisis is that different risks can crystallise at the same time, challenging financial stability, and the Central Bank said it is key to recognise that the risks could interact.
“For example, a disorderly Brexit would act as a trigger for an abrupt tightening in global financial conditions and lead to a macroeconomic disruption in Ireland, both of which would have adverse implications for domestic property prices,” it cautioned.
However, the Central Bank also said that the banking system here has strengthened considerably in recent years – despite vulnerabilities remaining.
It noted that domestic lending is now funded mainly through retail deposits, rather than less stable sources of short-term, wholesale financing.
Non-performing loans on the banks’ balance sheets have fallen by 79% since 2014, however they still remain higher than international standards, it also noted.
“Overall the banking system is now better able to absorb shocks, rather than amplify them,” the Central Bank wrote in today’s review.
But it added that further progress is needed to strengthen resilience and maintain sustainable profitability in a changing operating environment.
It also warned that while domestic households and companies have also become more resilient, a significant number of consumers with restructured mortgages could be especially vulnerable to economic stress.
The share of mortgage holders in negative equity has fallen from 40% in 2012 to 5% last year, but the Central Bank said the level of average household debt to income – which stands at 123% – is also high compared to international standards.
Last November, the Central Bank concluded its most recent review of the mortgage measures and decided to make no changes to its loan-to-value or loan-to-income limits or exemptions.
The bank said the measures were meeting their objectives in guarding against an excessive loosening of underwriting standards, strengthening both borrower and lender resilience, and minimising the potential for a credit-house price spiral emerging.
But it said that after consultation with the Minister for Finance, the Central Bank in June decided to exempt “lifetime mortgages” from the loan to income limit.
Lifetime mortgages are equity-release home loans to elderly people whose debts are later repaid from their estates after they die.
“These products do not have a contractual regular repayment of capital and interest, so the affordability of regular repayments, which is a primary concern of the LTI limit, is not applicable in these cases,” the Central Bank explained.
Meanwhile, the level of debt owed by SMEs to Irish banks has fallen by more than a third over the last five years and SMEs are increasingly using retained earnings to fund spending and investment rather than borrowing.
“As a small and highly globalised economy, with a particular reliance on activity from foreign multinational companies, Ireland is both more sensitive to developments in the global cycle and more prone to structural macroeconomic shocks,” commented acting Central Bank Governor Sharon Donnery.
Ms Donnery said it is critical that the Central Bank continues to identify, plan and prepare to mitigate the impact of those shocks, should they materialise.
“Building a resilient system is central to this. Resilience is not something that can be built after an event, but is something that should be in place well before any issues arise,” she added.
The Central Bank also said today that it has kept its Countercyclical Capital Buffer (CCyB) rate at 1%. The CCyB aims to strengthen the resilience of the banking sector to a future downturn.
It said it stands ready to adjust the rate in either direction “as the risk environment evolves in a manner consistent with the objective of mitigating procyclicality and supporting a sustainable supply of credit to the economy”.
The Central Bank said its macroprudential policies, which currently include its mortgage measures, the CCYB and capital buffers for systemically-important institutions contribute to safeguarding financial stability here.
The Minister for Finance today has confirmed that the power to set a Systemic Risk Buffer is to be granted to the Central Bank, which will complete the macroprudential framework for bank capital, it said.
No-deal Brexit could result in higher taxes for online shoppers
Minister of State for European Affairs Helen McEntee has said a no-deal Brexit could result in higher taxes for online shoppers and difficulties in returning goods, as the UK would no longer be subject to the same consumer rights and protections.
Speaking on RTÉ’s Morning Ireland, Ms McEntee said: “If the UK leaves with no deal, in terms of retail they will become a third country, in the same way that you’re dealing with the US or other third countries. There may be possible tax implications.
“Also, and I don’t do it myself, but I know plenty of people who might order five or six dresses, they get them, they try them on and they send a few back. If you’ve already paid taxes on them, how do you negate that?
“You’ve also got the fact that they will no longer be under the same consumer protections and rights.”
Ms McEntee said the situation is “is not going to be as good as we have now” and will cause the economy to slow down, cause the seamless flow of the all-Ireland economy to slow down and cost people their livelihoods.
She described yesterday’s report on Brexit preparations as “damage limitation” and said while the Government did not want to scare people it wanted to prepare them for the “significant challenge” ahead.
Ms McEntee also urged any motorists who live in Ireland and hold a UK driving licence to switch it over before 31 October, as drivers will need an up-to-date licence.
The Government, she said, is doing all it can to prepare for a no-deal Brexit, but admitted that “we’re not fully there yet”.
Ms McEntee could not say where checks on goods crossing the border will be, but said that meetings on the issue will continue over the summer.
She said there were many businesses who have not yet engaged and Government was trying to reach out to help them prepare for a no-deal Brexit.
Meanwhile, Fianna Fáil’s Brexit spokesperson said the Government needs to help small and medium businesses get prepared for Brexit.
Also speaking on Morning Ireland, Lisa Chambers said that the “cliff edge” is getting very close.
She added that the Government’s warnings yesterday were dire but nothing new, and she would have expected to hear about new plans from the Government yesterday also.
Ms Chambers said it is worrying that 40,000 businesses who trade with the UK have not yet registered with Revenue.
She said the Government needed to be more proactive in reaching out to those smaller businesses and hauliers and needed to work closely with these businesses to help them get ready, pointing out that they employ a large amount of people.
“It’s all well and good to say that it’s up to businesses to get themselves ready and that’s fine for a larger company that has plenty of resources that can actually spend the money to get Brexit prepared,” said Ms Chambers, “but most of our businesses are small and medium-sized enterprises and they employ the vast majority of our citizens.
“So the Government cannot take a hands off approach. It really has to be right in there working with businesses to get them prepared.”
President of the Irish Road Haulage Association Verona Murphy said that with the current state of preparation from Revenue and the State agencies for a no-deal Brexit scenario, many of the small and medium enterprise hauliers will go out of business.
Also speaking on RTÉ’s Morning Ireland, Ms Murphy, who will run for Fine Gael at the next election in Wexford, said the lack of financial support for the sector combined with the lack of skill set are to be blamed for the difficult situation hauliers may find themselves in.
“On one level it’s cost because there haven’t been any financial support afforded to the sector. The real reason is (that) the skill set isn’t there for which we can prepare.
“The agencies have done nothing except to prepare themselves. So customs have trained customs agents to deal with some people who have no idea what they’re doing. So more small, medium enterprises in this country will only trade with the UK and there is no bases for them in which to undertake customs courses.”
Ms Murphy added that while she appreciates that the Tánaiste, the Taoiseach, and Ms McEntee have done a great job because they were the ones who “put the structure of consultation in place”, the talks that the association has been involved in for approximately three years now have brought “no result”.
Ms Murphy said that she “absolutely” shares the views of those who claim the preparations for Brexit have been too slow, adding that “frustrations levels are now rising”.
“I asked a simple question of the head of the customs the other day. What sanitary facilities are being prepared at Rosslare for the drivers who obviously are going to be held up through no fault of their own.
“I was told it wasn’t a truck stop. That’s the typical attitude of State agencies, of their superior being displayed upon what – they would possibly regard – as somebody in a lesser position. And that will only serve to increase frustration levels,” she said.
Irish economic growth for 2018 revised up to 8.2%
The Irish economy grew 8.2% last year, according to new data released by the Central Statistics Office.
Gross Domestic Product, a measure of the total output of an economy, stood at €324 billion for the year, the CSO said.
But when the profits of multinationals were stripped out, as measured by Gross National Product or GNP, the economy grew at the smaller rate of 6.5%.
The GDP figure is higher than anticipated when the CSO reported provisional data in March, when it was estimated that it would come in at 6.7%.
The growth means Ireland’s debt to GDP ratio now stands at 63.6%, down from the peak of 120% in 2013.
Using Modified GNI*, a different measure of the economy which strips out the skewing caused by the depreciation of foreign-owned intellectual property assets here and the depreciation of aircraft owned by aircraft leasing firms, the size of the economy was €197 billion.
When measured using Modified GNI*, the debt ratio stood at 104%.
Today’s data also showed that Government expenditure rose 4.4% last year.
The significant economic growth in 2018 was driven by a 10.4% rise in exports of goods and services.
Among the areas of the economy where multinationals are most active, growth in the ICT sector registered a 21.2% expansion.
Meanwhile, in the domestically focused economy, the distribution, transport, hotels and restaurants sectors grew by 6.6%.
The positive growth trend continued in the first quarter of this year, albeit at a reduced rate, with GDP growing by 2.4% between January and the end of March.
GNP rose 2.1% during the same period.
The ICT sector expanded by 11.5% over the three months, while in the domestically focused economy, construction activity rose 5.6%.
The distribution, transport, hotels and restaurant sector registered a modest contraction of 0.1%.
On the international trade front, the current account of the Balance of Payments recorded a surplus of €11 billion in flows with the rest of the world between January and March, down from €11.3 billion in the same time last year.
The accounts also include Balance of Payments Current Account transactions with the UK, which show a surplus of €1.4 billion for trade with the UK in the first thee months of the year.
The CSO said this trade surplus was offset by a deficit of €2.9 billion in income flows, giving an overall current account deficit of €1.6 billion with the UK in the quarter.
Computer services exports rose by €5.7 billion in the quarter, compared to the same quarter a year earlier, the CSO noted.
Irish GDP growth has outperformed the rest of the European Union every year since 2014, undeterred by Brexit.
The Government has warned that Brexit could lead to a sudden contraction if the UK left without a transition agreement, which it does not yet have.
The strong first quarter also tallies with striking jobs numbers for the first three months of 2019.
The labour market, already close to capacity with unemployment below 5%, added new workers at the fastest pace since Ireland’s economic recovery began.
Many economists use the labour market as the most accurate barometer of how Ireland’s open economy is doing.
The relevance of GDP diminished when 2015 growth was adjusted up to 26% after a massive revision of the stock of capital assets.
Such distortions, related to the country’s large cluster of multinational companies, inflated GDP again for the last two years.
In its quarterly economic forecasts yesterday, the European Commission said that the Irish economy – as measured by GDP – will grow by 4% this year before moderating to 3.4% in 2020.
The commission predicted that the Irish economy will continue to grow at a solid pace, but warned that the risk of overheating could increase in the near term.
Commenting on today’s CSO figures, Minister for Finance Paschal Donohoe said the “continued softness in the international environment” and Brexit showed the need for careful management of the economy.
Ibec chief economist Gerard Brady said the negative impact of mounting global trade tension, whilst not targeted at Ireland directly, will inevitably wash up on our shores.
“How long these tensions last, and their ongoing reverberations will have a big say in the future of open economies such as ours,” he added. read more →
Economy set for solid growth but EU warns of overheatingThe European Commission has predicted that the Irish economy will continue to grow at a solid pace but warned that the risk of overheating could increase in the near term.
In its quarterly economic forecasts, the Commission said that the Irish economy – as measured by GDP – will grow by 4% this year before moderating to 3.4% in 2020.
This compares to its previous forecast of growth of 3.8% for this year and 3.4% for 2020.
The Commission said that domestic activity is projected to continue growing at a solid pace with robust private consumption growth underpinned by strong growth in employment and wages.
It added that investment in construction is also forecast to expand at a brisk pace.
The Commission noted that the economy maintained its momentum in the first half of 2019, with employment soaring by 3.7% year-on-year and the unemployment rate falling to 5% – a level last seen in 2007.
Average weekly earnings also rose by 3.4%, supporting household disposable income, it added.
But it cautioned that the economic outlook remains clouded by uncertainty, particularly due to Brexit and changes in the international taxation environment.
It also said that the “difficult-to-predict activities of multinationals could drive headline growth in either direction”.
The Commission also warned that in the absence of major negative external shocks, the risk of overheating could increase in the near term.
“The tight labour market and diminishing spare capacity point to an economy possibly operating above its potential,” it said.
“The use of volatile and potentially short-lived foreign-company sourced corporation tax receipts to stimulate domestic demand would also fuel overheating,” the Commission added.
Meanwhile, the European Commission has today lowered its estimates for euro zone growth and inflation, saying uncertainty over US trade policy posed a major risk to the bloc.
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Ireland remains competitive, but threats to economic sustainability on the rise
Ireland continues to perform well in the three most influential competitiveness indicators, according to the latest Competitiveness Scorecard published by the National Competitiveness Council.
The NCC said that Ireland is ranked 7th in the IMD rankings and ranked 23rd in both the WEF and World Bank rankings.
The NCC said that the economy made large competitiveness gains from 2010 onwards.
But it also pointed to the risks facing the country’s competitiveness, including Brexit and potential changes in US international trade policy.
It said these issues are compounded by domestic issues, including the concentration of the economy on a small number of firms, in a small number of sectors, which leaves it vulnerable to shocks.
The Council noted the risk of overheating – recently highlighted by the Irish Fiscal Advisory Council – but it added that this possibility could change rapidly in the face of an international downturn.
Today’s scorecard report also shows that Ireland also remains a high cost economy.
It said that higher costs, in general, are less of a concern, should productivity levels grow at a faster pace, but the majority of firms here are showing stagnant or declining growth in productivity.
Commenting on his last report as NCC Chairman, Professor Peter Clinch said that with the highest public debt levels in the EU, Ireland is vulnerable in the face of any future crisis.
Professor Clinch said that threats to the sustainability of the economy sit alongside other sustainability issues.
Ireland is on course to fail to meet its 2020 EU commitments for reductions in greenhouse gas emissions, which continue to rise despite decreasing across the EU, he said.
“The Council welcomes the Government’s Climate Action Plan and notes that significant behavioural change will be required for Ireland to come close to meeting its 2030 targets,” Professor Clinch added.
Annual inflation moves up to 1.1% in June
New figures from the Central Statistics Office show that the annual inflation rate inched up to 1.1% in June from 1% the previous month on the back of higher rents, more expensive utility bills and higher air fares.
June marks the fourth month in a row that inflation was 1% or higher.
Before this consumer prices had been broadly flat for several years despite the fact that the country’s economy has been the fastest growing in Europe.
Today’s CSO figures show that prices for housing, water, electricity, gas and other fuels rose by 4% due to higher rents and mortgage repayments as well as bigger electricity and gas bills.
Prices for alcoholic drinks and tobacco rose by 3.3% while prices in restaurants and hotels increased by 3.1% due to higher prices for people eating and drinking out.
Education costs rose by 1.7% while transport costs were also higher on the back of an increase in air fares and higher prices for cars.
Meanwhile, the cost of communications fell by 6.6%, while clothing and footwear prices reduced by 1% due to sales.
June also saw lower car insurance premiums and cheaper prices for appliances, articles and products for personal care, the CSO added.
Mortgage approvals rise by 10% in May year on year
Almost 5,000 mortgages to the value of over €1.1 billion were approved in May, the latest figures from Banking and Payments Federation Ireland show.
Over 51% of these were for first-time buyers while mover purchasers accounted for 26.3%.
Today’s figures show that the volume of approvals rose by almost 20% month-on-month and by 10% year-on-year.
Meanwhile, the value of mortgage approvals rose by 22.1% month-on-month and by 12.1% year-on-year.
The BPFI also said that re-mortgage/switching approvals rose on a year-on-year basis by 7.5% in volume and by 5.1% in value terms.
Felix O’Regan, Director of Public Affairs at the BPFI, said that mortgage approvals in May showed a significant increase in both volume and value compared to the previous month as well as the previous year.
“In line with the broad pattern over recent months this uplift in activity is very evident in the first-time buyer segment of the market, which continues to account for just over half of all mortgage approvals,” he said.
“All in all, these approval figures point to a good pipeline of mortgage drawdown activity,” he added.
Conall Mac Coille, chief economist with Davy, said the market was bouncing back after some weakness earlier in the year as fears around Brexit put people off going into the housing market.
“We’ve seen a rebound in residential transactions coming into the summer months. The other issue is that last year we saw a squeeze on people who could get an exemption above 3.5 times income. If we look at first time buyer average approval at the moment, at €238,000 it’s up 5% on last year”, Mr Mac Coille said.
“It looks like some of that squeeze that we saw in the market last year is going away. The banks don’t need to squeeze lending because of the changes in the rules 18 months ago. People are being approved for higher levels of mortgage debt and in time that will breed higher inflation,” the economist added.
He said suggestions that uncertainty around the future of the help to buy scheme was contributing to a slowdown in house building had yet to feed through to the figures.
“Completions in the first quarter were up. Commencements are up to about 23,000 in the 12 months to April. We’re not seeing any slowdown in the data on home building. We’re still at depressed levels and it’s picking up.”
In terms of the help to buy scheme, Conall Mac Coille said once such programmes are implemented, they’re hard to take away without resulting in politically difficult decisions.
“It would cause a bit of disruption and dislocation in the market. If a builder bought land expecting to achieve a particular price for the homes he’s going to sell, he would have to cut that back,” he stated.
- Fed poised to get in first with rate cut despite market risks
- Ireland at full employment as jobless rate unchanged
- Government surplus of €50m in 2018, new CSO figures show
- Disorderly Brexit biggest risk to financial stability – Central Bank
- No-deal Brexit could result in higher taxes for online shoppers
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- 15 Jul 2019Fed poised to get in first with rate cut despite market risks
- 15 Jul 2019Ireland at full employment as jobless rate unchanged
- 15 Jul 2019Government surplus of €50m in 2018, new CSO figures show
- 12 Jul 2019Disorderly Brexit biggest risk to financial stability – Central Bank
- 12 Jul 2019No-deal Brexit could result in higher taxes for online shoppers