IFAC urges Budget caution over Brexit, global risks
The Irish Fiscal Advisory Council has urged the Government not to rely on surges in corporation tax to cover spending overruns.
In its pre-Budget statement, the economic watchdog has said the Government should be cautious because of the risks associated with Brexit and a “worsening outlook” in the rest of the world.
IFAC said Ireland’s underlying budgetary position has deteriorated since 2015.
It argued that the benefit of record corporation tax receipts and lower interest rates have been undermined by increased spending, particularly unplanned spending in areas such as health.
The council said using bumper corporation taxes to balance the books “carries significant risks”, as they are likely to prove temporary and the spending measures likely to last longer.
It said there was a case for the Government to more cautious as the risks around Brexit increase and the outlook in the rest of the world gets worse.
The council also said the Government needed to deliver on a more credible medium term plan for the public finances.
One of its ideas is to develop a so-called prudence account to save excess corporation tax receipts.
The IFAC is an independent body set up under statute to assess and comment on government fiscal policy.
IFAC Chairperson Seamus Coffey, speaking to RTÉ’s Morning Ireland, said that budgetary planning on the basis of a hard Brexit is the “most appropriate course of action”.
He said that a no-deal scenario does appear the most likely and planning for this scenario makes the most sense.
Brexit, Mr Coffey said, should not have an impact on the overall package that the Government chooses to deliver.
He explained the Government has set out a plan for budgetary measures totalling €2.8bn and the IFAC believes the Government must stick to and deliver this plan.
He added that the Government’s existing commitments total around €2.2bn, leaving €600m for discretionary measures.
‘Industry central to Ireland’s climate action targets’
The government has advised industry that the environment needs to move higher up their agenda if businesses want to remain competitive.
“Irish enterprise has failed to break the link between economic prosperity and damaging greenhouse gas emissions,” Minister for Communications, Climate Action and Environment, Richard Bruton, told an industry meeting at Dublin Castle.
“To be competitive in a global economy which is adjusting rapidly requires that Irish enterprise be early movers and integrate climate action into their strategic planning.”
The minister outlined plans to reduce harmful emissions from industry and called on businesses to work with government to ensure that the country is ready for the opportunities and challenges this presents.
“Enterprises who fail to adapt will be uncompetitive in a changed world. There are huge opportunities for business in buildings, in transport, in smart technologies, and in waste management to reduce their costs,” the minister said.
“Big opportunities for enterprise will open up in renewables, in retrofitting and in the bioeconomy. Sectors will need to recognise the opportunities that will exist and build clusters of best practice.
“Capital must also be mobilised to deliver these changes and the financial services sector will have to be particularly innovative.”
Minister Bruton launched Pillar 5 of Future Jobs Ireland, a strategy to prepare businesses for the future, which is aligned with the Climate Action Plan.
Minister for Business, Enterprise and Innovation, Heather Humphreys said the move to a low carbon economy presents both challenges and opportunities for businesses. “It will radically change important sectors of the economy including some existing jobs roles while also presenting new opportunities to firms on the cutting edge of the transition.”
She said the government will introduce “Transition Teams” to help businesses and workers to develop and prepare.
“We want to be able to put the necessary supports in place now to help workers transition and take up new job opportunities in the future,” Minister Humphreys said.
She said there is funding available through the Regional Enterprise Fund, as well as the Disruptive Technologies Fund and Climate Fund.
Minister Bruton added that 75% of what we need to do will pay for itself, so we should be doing it even if there is no climate crisis.
Irish employment growth slows to a 6-year low
New figures from the Central Statistics Office show the numbers employed in the economy falling from March to June of this year.
The CSO’s latest Labour Force Survey has led to an upward revision in the unemployment rate for July from 4.6% to 5.3%.
The number of people at work is a key measurement of how our economy is doing.
The good news is there were 45,000 more people in employment here at the end of June compared to a year ago.
However, there was a reduction in the numbers employed in the months from March to June. Add in some statistical adjustments and it has led the CSO to revise upwards its latest unemployment rate for July from 4.6% to 5.3%.
Minister for Finance, Paschal Donohoe said he is encouraged by these figures which demonstrate the continued strength of the economy with employment growth spread relatively broadly across the regions and sectors.
“However, we did see a softening in the level of employment in the second quarter which was down from the record level set during the exceptionally strong first quarter, with a slight uptick in unemployment as well,” Minister Donohoe said. “This is not surprising given the strength of the first quarter numbers, and is in keeping with my Department’s overall outlook for the economy as set out in its Spring Economic Forecasts as published in the Stability Programme Update in April.
“A slight softening in the second quarter is in keeping with some of the high frequency economic data and surveys released during this period, as well as global economic developments.”
Dermot O’Leary, chief economist with Goodbody, said, “While one should not get carried away with one quarter, it does suggest that a combination of slower construction growth, Brexit uncertainty and wider global trade concerns is having some impact on the very open Irish economy”.
Separate figures show Ireland’s population continuing to rise.
More people coming to live here and more people being born has increased the population by 64,500 in the year to April bringing the population to 4.92 million.
Dublin accounts for 28.4% of the population with 1.4 million people.
New parental leave regulations coming into effect in September
New parental leave regulations will come into effect on September 1.
Employees will be entitled to 22 weeks unpaid parental leave which is an additional 4 weeks on current entitlements. This will then increase a further 4 weeks to 26 weeks from 1 September 2020.
The new Parental Leave Act also increases the maximum age of the child for whom parental leave can be taken, from 8 years to 12 years.
Melanie Crowley, Head of Employment and Benefits at Mason Hayes and Curran, said the regulations allow for parental leave to be taken in blocks, but most employers come to arrangements with employees allowing them take a day a week if that is the employee’s preference.
“What the legislation provides for, is that the leave will be taken in one block or in blocks of not less than 6 weeks. It’s only then with the consent of the employer that the employee can take a day a week, or something like that,” she said.
A survey of 400 companies conducted by business group, Ibec, found 81% of employers do agree to fragmented parental leave.
For businesses, Ms Crowley does not believe the extension to parental leave will be difficult to implement. “I think any absence is difficult for an employer to manage whether that is sick leave or maternity leave or parental leave. This increase is not enormous. The entitlement was already there. The implementation should already be there, it is just a slight tweak to existing provisions.”
It is not known how many employees avail of parental leave because it is an arrangement between an employer and an employee, and there is no obligation to notify the State.
Anecdotally, parental leave is taken by more women than men. “Parental leave is often something that is tagged on to the end of maternity leave or it is something that a woman takes, reducing her week to a 4 day week.”
Under the Government’s Parental Leave Scheme, employees will also be able to avail of two week’s paid parental leave benefit during the first 12 months of their baby’s life. This change is to take effect from November 2019.
4,920 new homes built between April and June – CSO
There were 4,920 new homes completed between April and June, according to the CSO, an 11.8% increase year-on-year.
More than half of those – 2,834 – were part of a scheme, which is classified as a development of two or more houses.
That figure is 2.6% higher than in the same three months of 2018.
Almost 760 apartments were built in the period, up 55.6% year-on-year. Meanwhile there was a 15.5% increase in single dwelling builds, which stood at 1,328 in the quarter.
The figures are based on ESB connections, which may also include older homes that are reconnected.
To counter this the CSO says it uses additional information from the ESB, as well as data from other sources.
It also notes that the figures currently do not cover the growing student accommodation sector, which is treated as a commercial rather than residential connection by the ESB.
The CSO said there were 329 ‘bed spaces’ completed for students in the second quarter, with 6,691 completed since the same period of 2016.
Dublin accounted for 31% of all new dwellings
During the three month period 1,546 dwellings were completed in Dublin, with a further 1,233 completed in the mid-east. Together they accounted for more than half of all new dwellings.
Meanwhile Naas was the Eircode with the most new dwellings in the quarter, with 204 completions registered.
The CSO said the number of ghost estates – many of which were left unfinished after the financial crash – continued to fall, with the number of previously finished dwellings in unfinished housing developments down almost 22% year-on-year.
It said these types of units now made up only 2.4% of all ESB domestic connections, compared to 21.7% in 2014.
The CSO data also shows a 5.8% fall in the average size of new dwellings between the first half of 2018 and this year.
Business activity growth at 3 month low, according to AIB PMI survey
Business activity in Ireland’s service sector expanded at the slowest pace in three months during July, amid the first reduction in foreign demand since November 2016.
According to the AIB Services Purchasing Managers Index survey, overall new order growth eased to a three month low, as firms commented that Brexit uncertainty had negatively affected customer demand.
As a result of softer demand conditions, service providers increased their payrolls at the slowest pace in over six years.
Meanwhile, the rate of input cost inflation eased to a 16-month low driven by slower raw material price rises.
The headline seasonally adjusted Business Activity Index posted 55.0 in July, down from 56.9 in June and signalling the softest rise in business activity for three months.
At the sector level, Financial Services firms posted the fastest rise in business activity of the four monitored categories.
Central to the slower rise in business activity was a weakening of customer demand conditions both domestically and abroad. Overall new order growth, though solid, eased to a three-month low, whilst export sales declined for the first time since November 2016 and at the fastest pace since July 2009.
Panellists commented that they had observed a drop in UK business resulting from Brexit uncertainty.
According to the index, employment across the Irish service sector continued to increase during July. That said, the rate of job creation softened to the weakest since May 2013.
Service providers commented that they had taken on additional staff in anticipation of higher sales activity later this year. All observed sectors recorded a rise in workforce numbers except Transport & Leisure, which saw a fractional decrease in headcounts in July.
Further solid increases in new orders contributed to another rise in outstanding business in July. The rate of backlog accumulation was solid, but eased to the slowest in three months.
Work outstanding has now increased on a monthly basis since June 2013.
On the price front, the rate of input cost inflation moderated in July to a 16-month low. Nonetheless, cost burdens rose sharply, amid higher transport, fuel and staffing costs.
With input prices increasing at a slower pace, the rate of output charge inflation softened to a three-month low.
Looking ahead, business confidence was the lowest in three months, as Brexit uncertainty weighed on sentiment. Just under 43% of panellists were confident of a rise in business activity from present levels in 12 months’ time, linked to expectations of higher sales activity and new product developments.
Oliver Mangan, AIB Chief Economist, said business activity in the sector continued to expand at a strong pace in July. “Although, the headline index reading of 55.0 was lower than the 56.9 level registered in June and represented the slowest pace of expansion in three months. The Irish level is well above the flash services July PMIs of 53.3 and 52.2 for the Eurozone and US, respectively. This indicates stronger growth in the Irish economy.
“New orders growth was solid, however, the pace of increase did also slow to a three month low,” Mr Mangan said. “Meanwhile, export orders contracted for the first time since November 2016, with a decrease in orders from the UK owing to Brexit uncertainty acting as a headwind. The service sector continued to create jobs, albeit at the weakest pace since May 2013 amid softer demand conditions.”
European debt rally pauses at start of a big week for bond markets
Core European government bond yields steadied on Monday after posting their biggest weekly drop in seven weeks as investors consolidated positions before a central bank policy meeting this week where policymakers might unveil plans of more rate cuts.
Though hopes have grown that the ECB might cut its deposit rate as soon as Thursday to soften the impact on the euro from a much-awaited Fed rate cut, market watchers say policymakers will change its forward guidance before taking fresh steps.
Money markets are assigning a 55pc probability of a 10 basis points deposit rate cut with a Reuters poll expecting the ECB to change its forward guidance towards more easing this week and move to cutting interest rates only in September.
As a result, German bond yields for 10-year maturities were broadly steady at minus 31 bps in early London trading and within striking distance of a record low of minus 40 bps hit earlier this month.
Spreads between benchmark US debt and corresponding German bonds were broadly steady at 273 bps.
Barclays strategists note that although hope of more ECB easing has increased since ECB President Mario Draghi’s June speech in Sintra, downside risks to the eurozone economy have not increased over that period.
Moreover, the Fed is also expected to cut rates by only a quarter point, compared to some bets of a half point rate cut.
“Therefore, we do not think Draghi will want to soften his easing bias from the Sintra speech…President Draghi is very likely to prepare the ground for a broad easing package in September,” they said in a weekly note.
Ongoing tensions between Britain and Iran over the seizure by Iran of an oil tanker is also set to keep demand of safe-haven core European debt intact.
Markets were also watching for political developments in Italy after tensions rose in the ruling coalition party last week, raising concerns that the increasingly unwieldy government might collapse.
Though Italian bonds have also broadly been the beneficiary of expectations of more ECB policy stimulus, with yields on 10-year debt falling by 120 bps since mid-May, the rally has stalled since late last week.
“We need to watch for more developments on the Italian political situation,” said Daniel Lenz, a rates strategist at DZ Bank in Frankfurt.
On a technical note, primary market activity is likely to remain slow with only Belgium and Italy to sell bonds this week though the net issuance of €4.5bn-€6bn is expected to be more than offset by inflows from redemptions and coupon payments, according to strategists at Unicredit.
First-time buyers feel ‘pushed out’ by bulk investors
Fianna Fáil is calling on the Government to restrict tax incentives for institutional investors in the Irish property market.
The party said so-called “cuckoo funds” have given rise to entire housing developments being snapped up, locking out first-time buyers.
A review by the Department of Finance into the amount of tax paid by these investors is due to be completed next month.
However, the department said institutional investors make up a very small proportion of the residential market.
Figures from Savills Estate Agents show that almost 3,000 properties were block-purchased by investors last year.
The agency said 234 properties were sold in bulk to investors in the first quarter of this year.
However, some prospective home buyers argue that large investment funds, which purchase properties in bulk, could be making it harder for families to get a house or apartment.
Nicola McCann, from Donabate in Dublin, and her partner are first-time buyers and are struggling to get onto the property ladder.
The couple and their young son moved in with Ms McCann’s partner’s family two years ago in order to save a deposit.
“It has been pull your hair out stressful, like our eight-year-old son is sleeping on a bean bag in his Nana’s room at the end of her bed.
“In Donabate there are so many new houses and then you go and look online and they’re all after being sold to private investors,” she said.
Ms McCann said they are saving nearly €2,000 every month to try to secure a deposit.
“It’s people like us and our friends that are now stuck and are being pushed out of where they want to live because we can’t afford it.”
New regulations being proposed by Fianna Fáil would give local authorities the power to restrict the number of properties being sold for rent.
The party is also calling for a full review of the tax treatment for institutional investors.
Fianna Fáil’s Housing spokesperson Darragh O’Brien said the 2013 Finance Act brought in by the Fine Gael and Labour government makes Ireland an attractive country for funds to do business in.
He said: “They don’t pay capital gains tax, they don’t pay tax on their profits and they don’t pay tax on their rents so why wouldn’t you invest”.
In a statement, the Department of Finance said many collective investment structures are designed so that the tax is payable by the investor or shareholder, rather than within the collective investment vehicle itself.
It said this is the case with Real Estate Investment Trust companies and with funds invested in real estate assets.
The department said that in both cases a withholding tax is applied to ensure tax is collected.
Chief Economist with the Sherry Fitzgerald Group Marian Finnegan said investment funds are an essential ingredient to the property market.
“I think they are a great new addition to the property market.
“We have seen over the last five or six years an emerging trend of Private Residential Investment funds coming into the marketplace.
“They are a very small percentage of the market and represent a very tiny percentage of overall transactions, but they are beginning to provide much needed rental accommodation and that is good news”.
Asked if there was a risk the funds would push first time buyers out of the market, she said: “Absolutely not if you look at the figures for the first quarter they bought in the hundreds and not the thousands in terms of property numbers.
“They are really just a very small proportion of the market overall. ”
Mr O’Brien said the State is also buying properties in bulk, which he said is having an impact on first-time buyers.
“It’s impossible for a potential first time buyer right now to compete against large pension funds on one side and the State on the other because the State is also buying up about 3,000 properties a year where first time buyers would want to buy.
Figures show the Government bought an estimated 2,600 properties from the open market last year.
474 properties were bought by the State in the first quarter of this year.
Road freight tonnage increased by 1.4% in 2018
A total of 149.2 million tonnes of goods was transported by road last year, new figures from the Central Statistics Office show, an increase of 1.4% on the 2017 total.
But the CSO said that activity measured as weight by distance was 11,445 tonne-kilometres in 2018, a decrease of 2.7% compared with 2017.
The total distance covered by road freight transport in 2018 was 1.6 billion kilometres.
The commodity group “Quarry products, metal ores and peat” represented 28.1% of all tonnes carried during the year.
Today’s CSO figures also show that a total of 32.8 million tonnes of goods was transported by road in the fourth quarter of 2018 – a drop of 7.9% on the same time in 2017.
There were an estimated 118,032 Irish registered goods vehicles (greater than 2 tonnes unladen weight) operating in Ireland and abroad in 2018.
This marked an 8.8% increase on 2017.
UK car industry warns next PM no-deal Brexit is not an option
Britain’s car industry has warned the next prime minister against a “seismic” no-deal Brexit in October, which it said could add billions of pounds in tariffs and cause border disruption, crippling the sector.
Boris Johnson, the frontrunner to succeed Theresa May, and his leadership rival Jeremy Hunt, have said they are prepared to take Britain out of the EU without a deal on October 31.
Both have said, however, that this is not their preferred option.
Industry body the Society of Motor Manufacturers and Traders (SMMT) warned about the scale of disruption a disorderly exit would cause.
“Leaving the EU without a deal would trigger the most seismic shift in trading conditions ever experienced by automotive, with billions of pounds of tariffs threatening to impact consumer choice and affordability,” it said.
The UK automotive industry fears that a disorderly exit from the EU, its biggest export market, could see the imposition of tariffs of up to 10% on finished models and border delays which could snarl up ports and motorways, ruining just-in-time production.
A hard Brexit border could cost £50,000 a minute in border delays, the SMMT said.
“The next PM’s first job in office must be to secure a deal that maintains frictionless trade because, for our industry, ‘no deal’ is not an option – we don’t have the luxury of time,” SMMT chief executive Mike Hawes told a conference.
The UK car sector, rebuilt by foreign manufacturers since the 1980s, had been a runaway success story in recent years.
But since 2017 sales, investment and production have all slumped, blamed on a collapse in demand for diesel vehicles and Brexit uncertainty.
Brexiteers have long argued that the EU’s biggest economy Germany, which exports hundreds of thousands of cars to Britain ever year, would do its utmost to protect that trade.
The British car sector has faced a series of setbacks this year including around 4,500 job cuts at Jaguar Land Rover (JLR) and plant closure announcements from Honda and Ford.
Several investment decisions are also due, including whether JLR will build electric cars in its home market and whether Peugeot will keep its Vauxhall car plant open.
“If the right choices are made, a bright future is possible,” said Hawes. “However, “no deal” remains the clear and present danger,” he added.
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