Tough Brexit talk fuels sharp drop in sterling

Tough Brexit talk fuels sharp drop in sterling
Sterling fell sharply yesterday as both candidates to become UK prime minister talked up their willingness to execute a hard Brexit during Conservative Party leadership debates.

On the eve of the Brexit referendum, it cost 76.5 pence to buy one euro. Now, with a hard Brexit fast approaching, a euro costs 90.22p and sterling looks set for further decline.

The Central Bank of Ireland said earlier this year that a hard Brexit could push the euro to 97p, and some economists have warned that parity – a one-for-one euro-sterling exchange rate – is a real possibility. Betting odds put Boris Johnson, who has said he could walk away without a deal, as 95pc certain to become Britain’s next prime minister, although the same odds show a 55pc chance the UK will still be an EU member at the end of this year.

Erik Norland, chief economist at the CME Group, the world’s biggest derivatives exchange, said sterling could be in for a dramatic autumn as the October 31 Brexit deadline looms.

“In other words, the downside potential for the pound becomes more acute as we enter the fall months,” Mr Norland wrote in a research report.

While the pound has fallen to levels not seen since 2017 against the dollar, hitting $1.2418 yesterday, it has traded weaker than 90p to the euro much more recently, and its move to 90.38p was the weakest since January this year. Even with signs of relative strength in the UK economy, which the European Commission expects to grow by 1.3pc this year and so outperform Germany, the pound has been weighed down by Brexit.

Any sharp moves in the pound and a fall towards parity will magnify the economic impact here.

Ryanair and the ferry operator Irish Continental have already warned of the impact of Brexit, and even though a weaker pound would push inflation here lower in the short term, there is a risk that the negative supply shock could cause prices to push higher, eroding wage gains in Ireland.

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Consumer spending falls in June – even online – as rain and Brexit dampen mood

Consumer spending falls in June – even online – as rain and Brexit dampen mood

Consumer spending has slowed at a pace not previously recorded in the past five years, according to a new analysis of spending in stores and online.

Visa’s Irish Consumer Spending Index, produced by IHS Markit, found on Wednesday that the total value of purchases – including use of cash, cheques and electronic transactions – declined in June by 2.6pc versus a year ago. That is the sharpest drop since IHS Markit began compiling these monthly reports in 2014.

“The latest CSI figures are a cause of concern, as both face-to-face and e-commerce registered declines in consumer spending,” said Philip Konopik, Ireland manager for Visa.

Retail Ireland, the IBEC body representing operators of 3,000 retail outlets across Ireland, said the comparatively weak June reflected two issues: sunshine and Brexit. While the sun blazed last summer, it was in short supply last month, and the current Conservative Party leadership tussle in the UK is depressing Irish sentiment, too.

“A 2.6pc decline does look significant. But when comparing recent spending with June 2018, we’ve got to be conscious of the terrific summer weather we had then. Prolonged hot weather drove footfall, so we’re coming off an artificial high. That accounts for the decline,” said Retail Ireland director Thomas Burke.

“There’s also a bit of softness in consumer sentiment at present that we can attribute, at least in part, to Brexit,” Mr Burke said. “The increase in public discussion of Brexit in the last couple of weeks has resonated strongly with consumers. It reins in spending when we see a spike in Brexit discussion.”

The monthly report also recorded its first quarterly decline in its five-year history. Spending in the April-June quarter fell 0.9pc versus the January-March period.

While IHS Markit’s monthly reports often show spending in shops struggling to record growth, this usually is offset by stronger spending online. But in June, online spending also recorded an 0.5pc drop from May – its first decline since October 2017.

Purchases didn’t fall in every sector, however. Spending versus May levels rose 5.1pc at hotels, restaurants and bars, 2.1pc for household goods, and 1.3pc for recreation and cultural activities.

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Hotels’ costs rising faster than revenues, says report

Hotels’ costs rising faster than revenues, says report

HOTEL insurance rates are rising by 10pc per annum, prompting some operators to rethink how their leisure facilities in particular are used, according to Aiden Murphy, a partner with accountancy and advisory firm Crowe Ireland.

He said one of the options for hotel operators is outsourcing the management of their leisure facilities.

“For most hotels, insurance is up 10pc year-on-year in terms of cost,” said Mr Murphy. “It’s a significant increase and it’s twice the increase hotels have seen in revenue terms.

“It’s growing at a level that is a problem for hotels, and a cost they have to focus more and more on,” he added.

“You could very well see that hotels might outsource their leisure centres on the basis that the insurance premium for that facility may actually fall to a third party, and it may allow the core hotel to bring down its own premium to a more manageable cost,” said Mr Murphy.

Releasing its annual analysis of Ireland’s hotel sector today, Crowe Ireland said that labour costs also remain a significant cost issue for hotels.

“For the second year in a row, payroll costs have also increased at a greater rate than total revenues, placing added pressure on hotels across the country,” the report states.

“Increasing costs relate to salaries and benefits, higher turnover levels and increased training and development in a highly-competitive arena. This will continue to be one of the most challenging areas facing Irish hoteliers in the coming years.”

Utility costs for hotels also rose by 8pc last year, according to the analysis.

“It is becoming harder for Irish hotels to increase profit levels despite reasonable revenue growth, as many costs are now increasing faster than the underlying growth in revenues,” claimed the Crowe Ireland report.

Last year, the firm said an additional 11,000 hotel rooms would be needed in Ireland over the next seven years as tourist numbers continue to increase.

Mr Murphy pointed out that Dublin’s hotel occupancy rate, at 84pc, is the highest of any European city.

If the occupancy level in Dublin eased to 80pc or 81pc due to additional rooms entering the market, he believes, then it might give the capital a “more competitive offering”.

That might also iron out instances where hotel rates spike when certain events are on in the city, claimed Mr Murphy.

“Average room rates in Dublin have grown very strongly – much stronger than in other European cities,” he said.

Crowe Ireland’s report shows the average room rate in Dublin last year was €145.82, which is 6.5pc higher than in 2017.

Nationally, the average nightly room rate also rose – to €118.27 last year – an increase of 6.3pc compared to 2017.

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Car running costs dip but insurance still an issue

Car running costs dip but insurance still an issue

The average cost of running a family car for a year stands at €10,590, according to the AA’s annual survey of motoring costs – a decrease of €98.11 on last year.

The survey also revealed a 7% drop in insurance costs, but the AA said the decrease has not been even across the market.

The AA said that groups like returning immigrants, young drivers and those with penalty points still pay “inordinately” high prices.

Conor Faughnan, AA Director of Consumer Affairs, said that for the second year in a row, the CSO findings in relation to insurance show a significant year-on-year drop.

Mr Faughnan said that while this is a positive development, we are still a long way away from truly fixing many of the issues in the insurance system which contributed to the price rises seen from 2015.

“It’s true that some progress has been made in this space, but with each passing month it begins to feel more and more that Government have moved their attention onto other matters and that motorists are simply being forced to get used to higher insurance prices,” he added.

Meanwhile, the AA’s monthly fuel prices survey the average cost of a litre of fuel has dropped by 2.5% in the last 12 months.

However, the group said the most recent drop in fuel prices came after a period of significant increases at the pump earlier in 2019.

The average price of petrol at 143.9 cent per litre as of June is down about 3.7 cent per litre on the price 12 months ago.

For a typical motorist in a Band B car this means they will pay €1,665 for their year’s fuel, down from €1,707. Of this figure, over 60% is made up of various taxes.

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EU goods trade gaps with US and China widen

EU goods trade gaps with US and China widen

The European Union’s trade surplus in goods with the US and its deficit with China both increased in the first five months of 2019, figures that could add extra strain to global tensions.

The European Union’s surplus with the US grew to €62.1 billion in the months from January to May from €55.4 billion the same time last year, EU statistics office Eurostat said today.

With China, the EU’s trade deficit expanded to €76.7 billion from €69.2 billion.

The US has hit the European Union with tariffs and threatened more in complaint over the trade balance. Both Washington and Brussels have also complained that China wants free trade without playing fair.

Overall, the goods trade deficit of the 28-nation bloc widened to €14.2 billion in the five month period from €9.9 billion a year earlier.

Energy imports, notably from Russia and Norway, were the chief cause of the deficit.

For the narrower 19-country euro zone, exports grew by 7.1% year-on-year in May and imports by 4.2%, leading to a widening of its trade surplus to €23 billion in May from €16.9 billion a year earlier.

On a seasonally adjusted basis, the euro zone’s trade surplus also increased to €20.2 billion in May from €15.7 billion in April as exports rose by 1.4% month-on-month and imports declined by 1%.

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Revenue intensifies Brexit engagement with businesses

Revenue intensifies Brexit engagement with businesses

Officials from Revenue will be contacting 92,000 businesses around the country as preparations for Brexit continue.

Businesses will receive letters and phonecalls from officials outlining the steps necessary to prepare for Britain leaving the European Union.

The head of Revenue’s Brexit Policy Unit said while businesses should register for an Economic Operators Registration and Identification number, that is only part of the process.

Lynda Slattery said business should also carry out an impact assessment to identify how Brexit can affect their company and supply chain.

She also said that companies should understand who will do their customs declarations and how import duties will affect the commodities they import.

Ms Slattery said that while officials will contact 92,000 businesses over the next eight weeks, this does not mean that all of these companies have not engaged in the Brexit preparation process.

“The 92,000 is the figure identified who had some level of trade with the UK in 2018. Some are registered, some are not. We’re not taking any chances and are contacting everyone. We’ve written to them all and will be ringing them all,”Ms Slattery stated.

Ms Slattery also said that while there is ambiguity about Brexit, Revenue are operating on the basis that Britain will leave the EU on October 31.

She added that Revenue can provide absolute certainty that customs formalities will apply when Brexit happens.

Ms Slattery also said there is support for businesses available through the Revenue and Enterprise Ireland websites, as well as via the Department of Business.

Revenue said that based on the most up to date information available, it is estimated that 33% of businesses in the wholesale and retail trade, and 15% of businesses in the construction industry, who trade with, or perhaps buy supplies on an ad-hoc basis from, the UK have not yet applied for an EORI number.

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Fed poised to get in first with rate cut despite market risks

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.

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Ireland at full employment as jobless rate unchanged

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.

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Government surplus of €50m in 2018, new CSO figures show

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%.

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Disorderly Brexit biggest risk to financial stability – Central Bank

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.

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