the economic outlook as brexit deadline approaches · rates have been cut in us, australia, new...
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The Economic Outlook as Brexit Deadline Approaches
9th October 2019
Gavin O’CarrollHead of Business & Retail Treasury Sales - Ireland
Global data generally weaker than expected this year
U S E c o n o m i c S u r p r i s e I n d e x
O N D J F M A M J J A S- 8 0
- 6 0
- 4 0
- 2 0
0
2 0
4 0
6 0
S o u r c e : T h o m s o n R e u te r s D a ta s tr e a m
E u r o z o n e E c o n o m i c S u r p r i s e I n d e x
O N D J F M A M J J A S- 9 0
- 8 0
- 7 0
- 6 0
- 5 0
- 4 0
- 3 0
- 2 0
- 1 0
0
1 0
S o u r c e : T h o m s o n R e u te r s D a ta s tr e a m
U K E c o n o m i c S u r p r i s e I n d e x
O N D J F M A M J J A S- 8 0
- 6 0
- 4 0
- 2 0
0
2 0
4 0
6 0
8 0
S o u r c e : T h o m s o n R e u te r s D a ta s tr e a m
E m e r g i n g M a r k e t s E c o n o m i c S u r p r i s e I n d e x
O N D J F M A M J J A S- 4 0
- 3 5
- 3 0
- 2 5
- 2 0
- 1 5
- 1 0
- 5
0
5
1 0
S o u r c e : T h o m s o n R e u te r s D a ta s tr e a m
Weakening manufacturing amid slowing global trade
48
50
52
54
56
58
Global PMIs
Manufacturing Services Source: JP Morgan via Refinitiv
Growth in W orld Trade (3 MMA) YoY %
2012 2013 2014 2015 2016 2017 2018
-1
0
1
2
3
4
5
6
World Trade - Netherlands Bureau for Economic Policy Analysis
Source: Thomson Reuters Datastream
Global growth forecasts cut for 2019 to 2.9% from near 4% a year ago
Weak manufacturing activity in particular, as global trade slows
Risks remain to the downside – trade wars, slowdown in China, uncertainty
Loose monetary policies, more expansionary fiscal policies and rising real
incomes are helping to support activity
Inflation remains subdued, despite some pick-up in wage growth
Global growth forecasts cut for 2019-20
GDP (Vol % Change) 2017 2018 2019(f) 2020(f)
World 3.8 3.6 2.9 3.0
US 2.2 2.9 2.4 2.0
Euro Area 2.4 1.9 1.1 1.0
UK 1.8 1.4 1.0 0.9
Japan 1.9 0.8 1.0 0.6
Source: OECD Interim Economic Outlook, September 2019
Central banks start to loosen policy again
Central banks concerns; slowing economies, low inflation, risks to global growth
May feel they need to act early as don’t have much ammunition
Rates have been cut in US, Australia, New Zealand, India in recent months
ECB eased policy last month – moved rates deeper into negative territory, restarting QE
1.00
1.40
1.80
2.20
2.60
3.00
3.40
Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Mar-21 Jun-21 Sep-21 Dec-21
US 3 Month Eurodollar Futures
Latest : 02-Oct-2019 As of: 28-Sep-2018
%
Source : Refinitiv -0.60
-0.40
-0.20
0.00
0.20
0.40
0.60
0.80
Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Mar-21 Jun-21 Sep-21 Dec-21
3 Month Euribor Futures
Latest : 02-Oct-2019 As of: 28-Sep-2018
%
Source : Refinitiv
Growth is easing from high level, with some data softening
40
60
80
100
120
Aug-12 Aug-13 Aug-14 Aug-15 Aug-16 Aug-17 Aug-18 Aug-19
Consumer Confidence (ESRI - KBC)
Source: Refinitiv
0
1
2
3
4
5
6
7
8
Q2 2013 Q2 2014 Q2 2015 Q2 2016 Q2 2017 Q2 2018 Q2 2019
Retail Sales (ex-autos) - Volume, YoY, %
Source: Thomson Datastream
%
45
50
55
60
65
Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Sep-18 Sep-19
AIB Irish Mfg and Services PMIs
Source: Refinitiv
Services
Manufacturing
-8
-6
-4
-2
0
2
4
6
8
Q2 2012 Q2 2013 Q2 2014 Q2 2015 Q2 2016 Q2 2017 Q2 2018 Q2 2019
Employment (YoY, %)
Public
Private
Total
Source: CSO via Refinitiv
%
Good Irish growth can continue if external risks avoided
Irish economy should continue to grow at impressive
pace, but not as strongly as in recent years
Construction picking up from still low output levels
Public spending on the rise
Activity supported by low interest rate environment
Good growth in household incomes
Continuing strong inflows of FDI
Irish inflation still very low
However, Brexit is a real challenge for the economy
Important also that global economy avoids downturn
GDP growth forecast at 5.0% for 2019 and 3.25% in
2020, assuming hard Brexit/global downturn avoided
ESRI estimates medium-term growth rate of
economy at around 3.25% in the period 2020-2025
0
5,000
10,000
15,000
20,000
25,000
30,000
2011 2012 2013 2014 2015 2016 2017 2018 2019(f) 2020(f) 2021(f)
CSO Housing Completions
Source: CSO, AIB ERU
0
4
8
12
16
20
Q2 2013 Q2 2014 Q2 2015 Q2 2016 Q2 2017 Q2 2018 Q2 2019
Irish Exports of Services(Volume, 3 Qtr Moving Average, YoY% Change)
Source : CSO
Still much uncertainty about Brexit
March exit date deferred as UK Parliament was unable to support Withdrawal Agreement
EU granted an extension to Article 50 up to end October
New PM Johnson vowed the UK would leave EU by end October, with or without a deal
Parliament against leaving the EU without a deal
It passes legislation to seek a further extension to Article 50, if deal not done
UK government against another Article 50 extension, but hard to avoid if deal not done
UK have produced alternative ‘backstop’ proposals, though unlikely to be accepted by EU
Difficult to get a deal done by mid-October EU summit. Article 50 extension seems likely
General election on the cards, likely in late November
Risk of no-deal hard Brexit will increase if Conservatives win general election
But election could also result in another hung Parliament, still deadlocked over Brexit
Brexit expected to lower growth rate of Irish economy
ESRI estimate that Irish output would be reduced over time by 2.6% under a ‘deal’
scenario in the long run (i.e. after 10 years). Unemployment rate is 1% higher
Multiple hits to the Irish economy from a no-deal Brexit: further collapse in sterling,
recession in UK, disruption to trade/supply lines, tariffs, new adm and regulatory costs
Sharp fall-off in trade with UK likely on a no-deal Brexit, with this shock front loaded -
around half of the impact on trade would take place in the first two years, per ESRI
In a ‘disorderly no deal’ scenario, ESRI estimates that GDP would be 5% lower after
10 years Unemployment rate would be 2 percentage points higher
Central Bank say a disorderly hard Brexit could reduce Irish growth by 4% in first year
and 6% in long run
Copenhagen Economics Report considered costs of regulatory divergence for goods
and services and of border checks, as well as tariffs in assessing impact of Brexit
Estimates impact by 2030 is to reduce Irish GDP by 2.8% under a soft Brexit (EEA),
4.3% in a FTA and 7% in a no-deal, hard Brexit WTO scenario
Agri. sector would be severely impacted by hard Brexit
Main EU tariffs relate to food products, keeping prices high. UK may also impose tariffs on all food imports post Brexit
Food and Beverages account for 25% of total Irish exports to UK
Around 40% of Irish food exports go to the UK – key market for beef and cheese
Other sectors very dependent on UK market include machinery and transport, metal products, textiles
Some 40% of indigenous Irish exports go to UK compared to 10% for foreign owned companies
0%
%5
%10
%15
%20
%25
%30
35%
40%
%45
50%
Share of Exports by Industry Destined for the UK (ESRI)
A total of 700 SME’s (with up to 250 employees) across the island of Ireland
AIB Brexit Sentiment Index – Q2 2019
Headline index remained depressed in Q2. Number of firms reporting that Brexit is having a negative impact on their businesses increased in both ROI and NI
SMEs also remain concerned about Brexit’s impact in the future, both on their own business & the wider economy
Manufacturing, Food & Drink, Tourism and Retail sectors most concerned about Brexit
40% of RoI and 38% of NI firms who had investment plans say they have been cancelled or postponed owing to Brexit.
Government bases Budget 2020 on no-deal Brexit
Government brings forward cautious Budget for 2020 based on no-deal Brexit
GDP growth forecast to slow to 0.7%, with no growth in GNP
Additional spending increases announced in Budget
Government provides for a €650m Brexit contingency fund to assist sectors that would be
hardest hit by a no deal Brexit - the Agri-Food, Enterprise and Tourism
Some €450m in tax hikes – carbon (€90m), Commercial stamp duty (€141m), Dividend
Withholding tax (€80m), Tabacco Excise (€57m) and Corporation tax on REITs/IREFs (€80m)
Budget to move back into €2bn deficit next year from a projected surplus of €600m in 2019
Overall, quite significant tax hikes in budget, with virtually no change in personal taxes
Current spending to rise by 3.5% in 2020, with capital spending up by 10%
Public finances expected to remain on a solid footing. Won’t be derailed by Brexit
Dollar holding upper hand, Brexit impacting sterling
Relative strength of US economy, wide interest rate differentials and geopolitical uncertainties
ddprovide support for dollar this year
Euro moves down to below $1.10 as ECB moves back onto policy easing path
Sterling volatile - weakened over summer on increased risk of no-deal Brexit
UK currency recovers ground in past month on growing hopes for a Brexit deal
0.84
0.86
0.88
0.90
0.92
0.94
Oct-17 Apr-18 Oct-18 Apr-19 Oct-19
Source: Refinitiv
Euro / Sterling Exchange Rate£
1.05
1.10
1.15
1.20
1.25
1.30
Oct-17 Apr-18 Oct-18 Apr-19 Oct-19
Euro / Dollar Exchange RateUS$
Source: Refinitiv
FX Market Outlook: Big sterling move possible
0.95
1.05
1.15
1.25
1.35
1.45
1.55
Oct-09 Oct-11 Oct-13 Oct-15 Oct-17 Oct-19
Euro / Dollar Exchange Rate
Source: Refinitiv
US $
0.65
0.75
0.85
0.95
Oct-09 Oct-11 Oct-13 Oct-15 Oct-17 Oct-19
Euro / Sterling Exchange Rate
Source: Refinitiv
£
Brexit - key factor influencing sterling in period ahead
If ‘soft’ Brexit looks on the cards, EUR/GBP could move down to 85-86p
If ‘hard’ Brexit becomes very likely, EUR/GBP could move above 93-95p and rise to parity
Dollar looks well underpinned near term, but US imbalances a long term worry
Expect EUR/USD to trade in a $1.08-1.12 for remainder of 2019
Note: All Irish data in tables are sourced from the CSO unless otherwise stated. Non-Irish data are from the IMF, OECD
and Thomson Financial. Irish forecasts are from AIB Economic Research Unit. This presentation is for information
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