Ireland: PMIs hitting highs as growth accelerates

Composite PMI increased in August to 61.8 from 60.2 – the highest reading since August 2000. The new order component increased to 61.7 – also the highest reading since 2000. Recall that Irish GDP increased by more than 10% that year. Irish service PMI climbed higher to 62.4 in August from 61.3. Manufacturing PMI, released on Monday, increased to 57.3 from 55.4 in July. This is the highest reading since December 1999. The new order component increased to 60.4 versus 57.1 in July.

Hard data is also signalling strong growth with retail sales up by 8.6% y/y in July and industrial production trending upwards with the latest June print up by 3.5% y/y. Car sales have surged around 30% since bottoming during 2013 although the level is still 50% down from the peak.

GDP figures for Q1 showed an increase of 2.7% q/q and 4.1% y/y. The jump was mainly driven by increasing net exports but domestic demand also made a positive contribution. We forecast 2014 GDP growth of 4.0%. For 2014-16, we expect an average yearly growth rate of around 3%.

The labour market is also showing positive developments. The unemployment rate has dropped 3pp since the peak and at 11.5% in July (Live Register) it is now at the euro area average. Employment has been increasing since the end of 2012.

Irish house prices increased 2.0% m/m in July. Compared to a year ago house prices are up by 13.4%. House prices have increased 17.1% since the bottom but are still some 41% down from the 2006 peak. House prices in Dublin increased 2.7% in July. House prices in Dublin have increased 33% since the bottom but prices are still 41% down from the 2006 peak.

The amount of non-performing loans declined further in Q2, although the level remains high. The positive development in the housing market, increasing employment and low rate level are all supportive factors. The Irish banking sector has been one of the biggest concerns. However, recently there have been tentative signs suggesting that the worst is over. The H1 earnings results from both AIB and BoI were substantially better than anticipated with both reporting positive earnings.

The accelerating Irish growth is having positive spill-over effects on public finances. The budget deficit is set to drop from 7.3% of GDP in 2013 to 4% of GDP this year (ESA 2010). Ireland will beat its target for the fourth consecutive year. The primary balance will be well within positive territory, beating the -0.1% of GDP target. Budget figures from January to August confirm this picture. Ireland is on course to reach next year’s deficit target of 3% of GDP and exit the Excessive Deficit Procedure. Ireland has so far conducted 92% of the fiscal belt tightening that was agreed with the Troika and only EUR2bn remains according to the Irish Ministry of Finance.

We expect that the convergence towards soft-cores such as Belgium and France will continue. Ireland has already conducted almost 90% of this year’s planned issuance with only EUR1bn remaining for Q4.