Ulster Bank Weekly Economic Commentary

Transcription

1 Ulster Bank Weekly Economic Commentary Simon Barry Chief Economist Republic of Ireland Ricardo Amaro Economist 26 January 2018 To subscribe or unsubscribe please contact Ireland: Mortgage drawdowns hit 9-year high of 7.3bn in 2017; inbound tourist numbers up 3.6% last year despite Brexit-related drop in visitors from GB The latest figures highlight that credit flows to the mortgage market continue to pick up at a solid rate. Over 2.2bn of new lending in the final three months of last year represented a 24% uplift from year earlier levels, in the process taking the full year total to 7.3bn. While this remains a distance short of the 2006 annual drawdowns peak of almost 40bn, it s the strongest in 8years, 29% higher than in 2016 and almost three times the (undoubtedly extremely depressed) level of 2.5bn recorded as recently as Separate figures on mortgage approvals point to the possibility of some moderation in growth in early 2018, but we expect further uplift in drawdowns this year, supported by continued growth in both transaction volumes and average mortgage size. Brexit-driven currency impacts on inbound tourism were again in focus this week with Q4 figures showing that visitor numbers from Great Britain to Ireland were down 5% last year the weakest performance in 7 years. Overall visitor numbers were up 3.6%, however, reflecting a 5th consecutive year of doubledigit growth from North America (+16.2% last year) and healthy 5.5% growth from non-gb Europe. These figures are sectorspecific obviously, but we think they usefully serve to highlight the potentially extremely important role that European and US economic growth dynamics can play in mitigating the overall impact of Brexit on the Irish economy. Slide 2

2 Eurozone: Draghi plays down chances of near-term rate rise but, with survey data continuing to surprise positively, may get more hawkish in the period ahead ECB President Draghi s January policy update this week was notable for its upgraded characterisation of Eurozone growth, now described as robust (from strong previously) having accelerated more than expected in H2 last year. Thus, despite Draghi taking the unusual step of explicitly citing exchange rate moves as a source of uncertainty and downside risk, a significant take-away from this update was the president s remark that strong cyclical momentum is strengthening further the ECB s confidence that inflation will get back to target. Given the central role played by the inflation outlook in ECB policy strategy, this explicit acknowledgment of greater confidence in a return to target is an important recognition of the link between much-improved economic performance and the building case for the commencement of a gradual normalisation of policy settings. Draghi made clear that, with underlying inflation pressures still looking subdued, a near-term policy shift is unlikely at one point saying that he sees very few chances at all that interest rates could go up this year, opting instead to implicitly endorse mid-2019 as a possible liftoff point. But these comments on rates were explicitly caveated with references to such views being conditioned on today s data and forecasts. Yet another strong upside surprise in this week s PMI surveys for January points to further upside for ECB (and consensus) forecasts for near-term growth prospects, so watch out for further hawkish updates from Draghi & Co in the period ahead. Slide 3 UK: Growth continues to show resilience in the face of Brexit headwinds This week s key data for Q4 confirmed that the UK economy continues to show resilience in the face of Brexit headwinds. GDP growth accelerated to 0.5% q/q in Q4 following 0.4% in Q3, slightly ahead of 0.3%/0.4% q/q envisaged by the prevailing consensus and the Bank of England. This left annual growth at 1.8% in 2017, down just slightly from 1.9% in The latest labour market data also contained positive signals. Growth in av. weekly earnings (excl bonuses) edged higher to 2.4% y/y in the three months to Nov. continuing its gradual upward trend from subdued levels of 1.8% in the three months to April. The 102k gain in employment in the three mths to Nov. was also ahead of expectations of a broadly flat performance, leaving the jobless rate at a multi-decade low of 4.3%. Overall, firmer than expected growth and labour market performance brings risks of some hawkish soundings at the February MPC meeting. While we think that a second Bank of England rate hike in February looks unlikely, current market pricing signalling a further 25bp hike only late in 2018 may be subject to some further upside risk to rates. On Brexit, remarks from UK Chancellor Hammond expressing a preference for a soft-brexit deal angered some MPs in his own party, presenting further evidence of tensions and discord within the Conservative Party over Brexit. Slide 4

3 US: A healthy end to 2017 rounds off a positive year for the US economy Figures out today show US real GDP growth at 2.6% q/q (annualized) in Q4 following two quarters in a row of 3%+ growth. This reading was slightly softer than the 3.1% expected by the consensus, but the expenditure breakdown provided reasons for optimism as the disappointment was largely due to a larger than expected drag from net trade and inventories. Consumer spending rose 3.8% q/q (annualized), a near twoyear high. Business investment grew at the fastest pace in three years, with final sales to domestic purchasers (a key gauge of underlying dom. demand) rising by 4.3% q/q (annualized), an over three-year high. A healthy end to 2017 rounds off a positive year for the US economy, with GDP growth accelerating to 2.3% in 2017 as a whole from 1.5% in Looking ahead, the favourable domestic demand backdrop (supported by the tax cut) and a strengthening global economy suggest that growth is likely to remain robust over the near-term, with the consensus expecting a further acceleration to growth in 2018 to 2.6%. Slide 5 Financial Markets: Mnuchin comments send dollar to fresh multi-year lows; good news for Irish exporters as Eur/GBP touches 7-month low In a highly eventful week for markets, the US administration s policy towards the dollar took centre stage. Comments from Treasury Secretary Mnuchin that a weaker dollar was in the interests of the US were taken a softening of the long-standing strong dollar policy, in the process giving markets the green light to continue pushing the greenback lower. The result was fresh multi-year highs on Thursday for both Eur/USD (of over $1.25) and GBP/USD (of over $1.43). International criticism quickly followed including from Draghi who, highly unusually, took the opportunity of his press conference to remind the US of its commitment to not target the exchange rate in pursuit of national interests. The US has responded by claiming that Mnuchin was taken out of context, with Trump intervening in the debate to clarify that his administration wants a stronger dollar. The attempted row-back has lifted the dollar off its lows, but it still ends the week some 2.4% and 1.7% lower vs. the pound (at $1.4160) and euro ($1.2490) respectively. While Eur/USD has been breaking to the top-side, Eur/GBP has been testing the low end of its recent range. Strong Eurozone growth news prompted a further 8bps of upside for 5- year swap rates which end the week at a 28-month high of 0.45% but there has been an even greater move to the upside in UK rate expectations, helping to push Eur/GBP to its lowest level in over 7 months at sub 87p at one point on Thursday. Slide 6

4 Currency and interest rate market trends Slide 7 Market Monitor Foreign Exchange Markets Latest weekly, % EUR/GBP, GBP/EUR, EUR/USD, $ GBP/USD, $ EUR/JPY, JP GBP/JPY, JP USD/JPY, JP EUR/CHF, CHF Stocks & Commodities Latest weekly, % ISEQ 7, STOXX Europe FTSE 100 7, S&P 500 2, Dow Jones 26, Nasdaq 7, NIKKEI 23, OIL (London Brent) Gold 1, Interest Rate Markets Latest (%) weekly, bps EUR 3 Month Euribor Year Swaps Year Swaps Year Swaps GBP 3 Month Libor Year Swaps Year Swaps Year Swaps USD 3 Month Libor Year Swaps Year Swaps Year Swaps Note: the data in the tables are indicative only and are sourced from Bloomberg. Latest data are updated as at the time of publication. weekly refers to the change from the previous week s closing levels. Ulster Bank Cost of Funds Rate (365 day count) = 0.54% Euro rates are quoted in 360-day convention. To convert to 365 day count, divide by 360, & multiply by 365 Slide 8

5 Highlights for the week ahead: Irish calendar includes retail sales and the monthly unemployment rate; Brexit negotiations to resume A busy week in the Irish economic calendar features key official activity data for December, including retail sales volumes (on Monday) and industrial production (on Friday). We also get an early glimpse on how the economy is doing early in 2018 with the release of the January monthly (unofficial) unemployment rate and the Manufacturing PMI. Meanwhile, the second stage of Brexit negotiations is expected to resume next week following the publication of the EU-27 approach to the transition arrangements (on Monday). In the Eurozone, the consensus expects that GDP growth moderated to 0.6% q/q in Q4 following 0.7% in both Q3 and Q2, but the strength of survey indicators and recent activity data suggests some upside risk to this forecast. Regarding HICP inflation, while the headline measure may have moderated further in January, core inflation is expected to have edged higher from 0.9% in December to 1% in January. In the US, Wednesday s FOMC meeting is expected to result in unchanged monetary policy settings. However, with the US economy currently enjoying robust growth, its labour market beyond full employment, and some early evidence of firming inflation, the Fed may signal that further rate hikes may soon be warranted. Meanwhile, the January payrolls report is expected to show solid job gains and rising earnings growth. Slide 9 Economic calendar for the week commencing January 29th Ireland / Eurozone UK US Monday EU-27 approach to Brexit transition arrangements Retail Sales volumes (Dec) Personal Income / Spending (Dec) PCE Deflator (Dec) Tuesday EZ GDP growth (Q4) EZ Sentiment Indicator (Jan) Net Consumer Credit (Dec) Mortgage Approvals (Dec) S&P Case-Shiller House Price Index (Nov) Conf Board Consumer Confidence (Jan) Monthly Unemployment Rate (Jan) Germany HICP inflation (Jan) M4 Money Supply (Dec) BoE Carney speaks before Parliament Wednesday France HICP inflation (Jan) EZ HICP inflation (Jan) EZ Unemployment Rate (Dec) GfK Consumer Confidence (Jan) Trump state of the union speech MBA Mortgage Applications (Jan 26) ADP Employment Change (Jan) FOMC Meeting Thursday Investec Manufacturing PMI (Jan) EZ Manufacturing PMI Final (Jan) Live Register (Jan) Markit Manufacturing PMI (Jan) Initial Jobless Claims (Jan 27) Construction Spending (Dec) ISM Manufacturing (Jan) Friday Industrial Production (Dec) Monthly Services Index (Dec) Markit Construction PMI (Jan) Change in Nonfarm Payrolls (Jan) Av. Hourly Earnings (Jan) The Calendar uses Irish local time Slide 10

6 Important Information This document 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. Ulster Bank Ireland DAC. A private company limited by shares, trading as Ulster Bank, Ulster Bank Group, Banc Uladh and Lombard. Registered in Republic of Ireland. Registered No Registered Office: Ulster Bank Group Centre, George's Quay, Dublin 2, D02 VR98. Member of The Royal Bank of Scotland Group. Ulster Bank Ireland DAC is regulated by the Central Bank of Ireland. Calls may be recorded. Ulster Bank Limited Registered Number: R733 Northern Ireland. Registered Office: Donegall Square East, Belfast BT1 5UB. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority, and entered on the Financial Services Register (Registration Number ). Calls may be recorded. Slide 11