Investec Services PMI for Ireland May 2014 shows positive signs

The latest Investec Services PMI Ireland report shows another strong rise in business activity during May. While marginally below the multi-year high of 61.9 in April, the 61.7 headline PMI reading suggests that the sector is expanding at a blistering pace.

Today’s release shows continued healthy demand from end-customers at home and abroad.

The New Business component posted growth for a 22nd successive month, with unadjusted data showing that each of the four sub-sectors covered by the survey – Business Services, Financial Services, TMT and Transport & Leisure – simultaneously recorded above-50 readings for a tenth consecutive month. While the rate of growth in the New Export Business component slowed to an eight month low, growth remained robust and there were some encouraging signs from the UK and certain Asian markets.

The rate of job creation remained sharp, despite easing to its weakest level since November 2013. Irish services companies have now added to their headcounts in each of the past 21 months. Unadjusted data show an appetite to continue to increase staffing levels across all four sub-sectors – a necessary move, given that the Business Outstanding component, which measures backlogs of work, has consistently grown over the past 12 months.

On the margin side, Input Prices rose once more, as they have done in every month since November 2010. While Output Prices increased, albeit marginally, for the third time in the past five months, we note that the benefits were thinly spread, with circa 89% of respondents signalling no change in prices charged during the month. Despite this, the profitability component remained above 50 for the 11th time in the past 12 months, as volume growth offset margin pressure.

All in all, while most components in today’s report point to a moderation in the rate of expansion, we would not be particularly concerned given that the white-hot rate of growth recorded in the sector during April (the fastest since February 2007) was unlikely to be maintained for long. We draw comfort from the forward-looking ‘Expected Levels of Business Activity in 12 Months’ Time’ component, which has been stable at a robust rate of growth for the past three months. So, taken together with the decent Manufacturing PMI report earlier this week, today’s release bodes well for the performance of the wider Irish economy during Q2 and beyond.

Exchequer Returns continue to surprise to the upside

Exchequer Returns released yesterday evening by the Department of Finance (DoF) show a continued outperformance by the public finances relative to targets. Tax receipts for the first five months of 2014 came in at €15.6bn, up 5.6% y/y and 2.9% ahead of the DoF’s guidance. Net voted (discretionary) expenditure was -2.7% y/y and 0.9% below the DoF’s guidance.

On the revenue side, eight of the nine tax headings came in ahead of profile. The main outperformer, in percentage terms, was Stamp Duty, with receipts of €290m exceeding expectations by 13.2%. The 29.4% y/y decline in this heading is down to one-off payments received last year, with underlying stamp duty receipts +20.4% y/y. Corporation Tax was close behind in terms of exceeding expectations, coming in 13.1% ahead of profile at €981m. Again, while corporation tax receipts were -5.8% y/y it should be noted that this was down to an “unexpected” large payment received last year, with inflows under this heading often volatile. The Local Property Tax was 5.4% ahead of profile at €290m. While not mentioned in the release, we suspect a high profile campaign by the Revenue Commissioners to collect amounts outstanding from households has contributed to the outperformance here.

In terms of the consumer-facing tax headings, Excise Duties were 4.9% ahead of profile and +5.5% y/y at €1.9bn, with the outperformance here likely to be partly driven by the surge in car sales since the start of the year. VAT was a touch (0.7%) ahead of expectations (and +4.4% y/y) at €5.2bn, likely helped by the positive retail sales performance in the year-to-date. Customs receipts were very marginally ahead of expectations and +2.8% y/y at €87m.

Income Tax was 1.8% ahead of profile and +7.8% y/y, helped by the improving labour market conditions.

Non-tax revenues were -3% y/y and 23% above profile at €1.68bn, notwithstanding a 76% y/y drop in ELG income to just €102m (this was in-line with expectations as the ELG scheme was closed to new liabilities at end-March 2013). The outperformance here is made up by higher than expected Central Bank surplus income and dividends from semi-State companies. Capital receipts were +€1.2bn y/y at €3.1bn, as the repayment of loans to the Social Insurance Fund have more than compensated for the absence of the €1.01bn gross proceeds from the sale of contingent capital notes in Bank of Ireland during 2013.

Turning to the expenditure side, of the 16 Ministerial Vote Groups, 11 saw a year-on-year reduction in expenditure while 12 saw spending come in below profile. Total net voted expenditure, at €17.2bn, was -2.7% y/y and 0.9% inside the DoF’s profile. The underspend was mainly on the capital side (6.5% below profile), but current expenditure was 0.6% below profile. The four government departments that spent more than had been budgeted were Transport, Tourism & Sport (10% above profile due to overruns on the capital side, possibly down to timing); Justice & Equality (0.9% above profile), Health (2.8% above profile, due to overspends on the current expenditure side) and, somewhat ironically, Public Expenditure & Reform (1.2% above profile).

The Social Protection budget was -2.7% y/y (-€451m), with this likely to be in part driven by the same positive labour market trends that have helped lift the Income Tax receipts – combined, these are a critically important factor in the narrowing of the fiscal ‘jaws’.

Non voted current expenditure was -16% y/y at €5.1bn, mainly due to the absence of the €0.9bn in ELG payments to IBRC bondholders made in 2013, while non-voted capital expenditure in the year to date, at €2.1bn, compares to €0.5bn in the same period last year – chiefly due to loans to the Social Insurance Fund which, as noted above, have since been repaid.

All in all, the combined outperformance by tax receipts and voted expenditure in the first five months of the year, at €602m, equates to 0.4 % of GDP. With ‘austerity fatigue’ acknowledged to be a factor behind the setbacks suffered by both Irish government parties in the recent local and European elections, the issue of what, if anything, to do with this fiscal beat is sure to be the subject of deliberations around the Cabinet table. In saying that, we would note that the government’s own fiscal estimates suggest a deficit of 4.8% of GDP is likely for 2014 (and 2.9% in 2015, which assumes that a further €2.0bn of fiscal consolidation measures are implemented in the next Budget), so the scale of the outperformance will have to pick up sharply from here for policymakers to be able to avoid having to bring in new tax increases and spending cuts come October. All in all, while most components in yesterday’s report point to a moderation in the rate of expansion, we would not be particularly concerned given that the white-hot rate of growth recorded in the sector during April (the fastest since February 2007) was unlikely to be maintained for long. We draw comfort from the forward-looking ‘Expected Levels of Business Activity in 12 Months’ Time’ component, which has been stable at a robust rate of growth for the past three months. So, taken together with the decent Manufacturing PMI report earlier this week, yesterday’s release bodes well for the performance of the wider Irish economy during Q2 and beyond.

Industrial production up again in April

Industrial production data released yesterday by the CSO show that production for manufacturing industries rose 2.5% m/m in April (+11.9% y/y). The seasonally adjusted volume of industrial production for manufacturing industries for the three months February-April 2014 was +7.7% on the preceding three months.

Encouragingly, the release shows growth across both the ‘Modern’ sector (+1.7% m/m and +13.5% y/y), which is dominated by the pharmaceutical industry, and the jobs-rich ‘Traditional’ sector (+0.5% m/m and +2.0% y/y). The volume index of production for the ‘Modern’ sector has recovered to stand just above the level it was at in August 2012, just before the 24% m/m decline in production in that area in September 2012 which heralded the beginning of the ‘patent cliff’ pressure on the pharmaceutical sector.

The ‘Chemicals and pharmaceuticals’ sector posted a 15.1% rise in production over the three months between February and April compared to the preceding three months, with this improvement suggesting that the worst of the ‘patent cliff’ effects may be behind us, although we would caution that production in that sector can be volatile.

All in all, this is a reassuring update which shows that the recovery in manufacturing production appears to be gathering momentum following the challenging period seen during late 2012 and throughout 2013. Source: www.investec.ie