NCB Release Irish Economy Monitor February 2013

The main event since our last update was the Promissory Note (prom note) deal, which served to ease Irish funding requirements into the longer term. Following the replacement of the amortising prom note with long-term government bonds, we have upgraded our deficit projections for both 2014 (from 5.4% to 4.9% of GDP) and 2015 (from 3.3% to 2.6%). Other positive developments include further well-covered T-bill issuance by the NTMA and, on the banking front, a well-received €500m Covered Bond sale by AIB.

Both NCB Ireland PMI readings continued to provide encouraging read-through for the private sector, with Manufacturing (50.3) representing an 11th successive month of growth, and Services (56.8) in positive territory for six months in a row. The merchandise trade surplus for 2012 came in at €43bn, +0.2% y/y, which is a creditable performance in light of the challenging conditions experienced by many of Ireland’s key trading partners during the year.

Data released by the CSO showed that Irish residential property prices fell by 4.5% in the year to December, the slowest pace of annual decline since May 2008. Elsewhere, data compiled by the PRSA showed a surge in residential property transactions in the final quarter of 2012. While some of this was attributable to the expiry of mortgage interest relief on December 31, mortgage approvals statistics from the IBF point to a further increase in sales this year. On the consumer side, core retail sales increased on an annual basis in both volume and value terms for a fifth successive month in December. Another indicator that is moving in the right direction is the Live Register, which fell for a seventh successive month in January. The annual rate of inflation was unchanged at 1.2% in January.

In terms of the public finances, an Exchequer surplus of €704m was recorded in January. While this was flattered by a €1bn inflow from the sale of Bank of Ireland CoCos, underlying tax revenues rose by an impressive 5.6% y/y. The recently agreed sale of Irish Life for €1.3bn provides another windfall for the Exchequer as well as providing a vote of confidence in the economy. Speaking of votes of confidence, S&P raised its outlook on Ireland to ‘stable’ from ‘negative’ during the month.

All in all, recent developments serve to reinforce our view that the Irish economy is continuing its gradual recovery, which alongside supportive external developments such as the prom note deal has underpinned improved investor sentiment towards both the Sovereign and the banks.

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