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Markets News Friday: UK GDP fell at biggest annual rate in Q2 2009 since 1955; Permanent TSB to hike mortgage rates
By Finfacts Team
Jul 24, 2009 - 10:42:07 AM
The UK economy contracted more than twice as much as economists forecast in the second quarter as a record annual slump in construction, banking and business services kept the UK deep in recession. The Office for National Statistics (ONS) said the economy shrank by 0.8% between April and June, at an annual rate of 5.6% in the second quarter of the year - - the biggest fall since its records began in 1955.
The data show the economy has now shrunk by 5.7% since the recession began last year. That compares with a total 6.4% slump in the recession period that ended in 1981, the ONS said.
Although the quarterly drop was better than the 2.4% fall in the first quarter of 2009 - - - the worst since 1958 - - economists were forecasting a much bigger improvement in the economy.
A 0.7% fall in output from business services and finance was the biggest driver behind the contraction. The services industry - - accounting for almost three-quarters of overall economic output - - showed a 0.6% decline.
Construction industry output fell 2.2% over the quarter and is now 14.7% below the same period last year. Production industry output, including construction, mining and manufacturing, fell 0.7%.
Permanent TSB rate hike
Permanent TSB, the troubled banking unit of Irish Life & Permanent, is to increase its standard variable mortgage interest rate by half a percentage point from next Monday. The move will result in mortgage payment hikes for more than 50,000 borrowers.
Customers on standard variable rates will see rates rise from 2.69% to 3.19% from Monday. On a €300,000 mortgage, monthly repayments will increase by €70 a month.
The bank is losing money on tracker loans which are linked to the ECB's benchmark rate, currently at 1%. It's believed most of the bank's customers who took mortgages over the past five years are on tracker loans and will not be affected by the hike in the variable rate.
The general president of the SIPTU union, Jack O'Connor, said he would write to Finance Minister Brian Lenihan calling on him to withdraw the Government's guarantee from banks which plan to raise interest rates to mortgage holders.
"Apart from the sheer immorality of increasing interest rates it will further exacerbate our overall economic problems, further damaging consumer confidence and reducing consumer demand, thus jeopardising even more jobs in the economy,"he said.
Immorality?
Credit rating agency Fitch downgraded IL&P from C to B/C, earlier this week, due to concerns about its profitability over the next two to three years.
Fitch said Permanent TSB would probably report a loss this year, and could make another loss in 2010. The agency said Permanent TSB was suffering from more expensive funding on international markets and could not re-price its loans quickly enough to compensate, resulting in lower revenue from interest.
Vodafone
Vodafone said today its mobile customer numbers in Ireland fell in the three months to the end of June.
In a trading update, the company said it has 2,129,000 customers at the end of June, a decline of 46,000 from the figure three months earlier.
Vodafone, the world's largest mobile phone firm, reported total sales in line with market expectations for the quarter as strength in India and Africa compensated for weakness in Europe.
It confirmed its reduced full-year outlook for, at best, flat profits but did not provide a revenue forecast.
In the quarter, group revenue rose 9.3% from a year earlier to £10.74 billion, due to positive currency impacts and a higher stake in South Africa's Vodacom.
Revenue dropped in Spain, UK and Germany.
Vodafone said it added eight million customers in the quarter, taking its proportionate customer base to 315 million.
Vodafone's share price rose 2.2% in London.
Ericsson
Swedish telco Ericsson today reported a drop of nearly 60% in second-quarter net profits.
The company posted net profits of €753m, down 57% on the same period in 2008.
"The effects of the global economic climate on the mobile infrastructure market are now more notable, especially in markets with currencies under pressure and tougher credit environment," said Ericsson president and chief executive Carl-Henric Svanberg.
The share price is down over 7% in Stockholm.
US
Strong housing data and good earnings reports - - Microsoft issued a poor fourth quarter earnings report, after the closing bell - - triggered a stock-market raklly in New York Thursday, pushing the Dow over the 9,000 mark and the Nasdaq Composite Index to a winning 12-day straight streak.
The Dow Jones Industrial Average jumped 188.03 points, or 2.1%, to 9069.29, boosted by gains in components 3M, up 7.4%, and AT&T, up 2.6%. Both had announced falls in profits smaller than analysts expected.
The Dow is back to its highest point since Nov. 5th, up 3.3% in 2009 but down 36% from its closing record in October 2007.
The Nasdaq Composite Index rose for a 12th day in a row -- the longest such streak since 1992. The tech-dominant index rose 2.5%.
The S&P 500 gained 2.3%.
Treasury prices dropped as investors switched to stocks, pushing the yield on the benchmark 10-year note to its highest level in more than a month.
Asia
Bloomberg reports South Korea’s economy expanded at the fastest pace in almost six years last quarter as exports and household spending jumped.
Gross domestic product rose 2.3% from the first quarter, when the nation skirted a recession by growing 0.1%t, the Bank of Korea said today in Seoul. That was better than the 2.2% growth estimated by economists.
TheMSCI Asia Pacific Index rose 0.9% Friday. The index has risen 9.9% in the past nine days, the longest winning streak since August 2004.
The Nikkei rose 1.55% and South Korea's Kospi added 0.41%.
The Markit Flash Eurozone Composite Output Index, based on around 85% of normal monthly PMI (Purchasing Managers' Index) survey replies from the manufacturing and services sectors, rose from 44.6 in June to 46.8 in July. The latest report, released this morning, signalled an easing in the rate of decline for the fifth successive month and the smallest monthly drop in output for ten months. The easing was driven largely by a marked slowing in the rate of contraction of manufacturing output - - see link in Box above.
The pan-European Dow Jones Stoxx 600 index is up 0.4% Friday.
The ISEQ is also up 0.4%.
CRH rose 1.4%; Ryanair is down 3% and Greencore has fallen 4%.
For live currency updates, check the right-hand column of the Finfacts home page.
The US dollar fell to $1.6038 per euro on Tuesday, July 15, 2008 - an-all time record.
Commodities
The Baltic Dry Index, a measure of shipping costs for commodities, ended last week with a weekly increase of 18.7%. The index, which hit 3,542, was still down 60% from the 9,092 level a year ago, when freight rates were soaring, dropped 1.5% on Thursday, following a 1.8% dip on Wednesday.
Jay Ryu, an analyst for South Korea’s third-largest brokerage, predicted the index will almost double its current level to 6,000 points this year. It peaked about 11,700 points in 2008.
Gold is trading at $950.80 up $2.80 from Thursday's spot price close in New York.
Davy chief economist Rossa White comments: Possibility of NAMA bonds staying off state's balance sheet - - "Yesterday's report from the NTMA contained an important insight. It concerns the classification of the new National Asset Management Agency (NAMA). Many people have assumed that NAMA will be on the Irish government's balance sheet, but that may not be the case. Last week's ruling by Eurostat ("The statistical recording of public interventions to support financial institutions and financial markets during the financial crisis") suggests that NAMA may well stay off balance sheet. That means bonds worth up to 40% of GDP may not add to Irish gross government debt.
The Eurostat ruling is quite complex, but the crucial section from an Irish point of view is 8. Classification of certain new bodies. To sum up, it seems that autonomy of decision is the salient factor. The following sets out the position: 'Where a new body is created . . . the identification of an institutional unit in the national accounts requires that the body has "autonomy of decision" in respect of its principle function and either keeps a complete set of accounts or it would be possible and meaningful, from both an economic and legal viewpoint to compile a set of accounts if they were required'. On that basis, NAMA – which will make its own decisions – could be classified outside the General Government sector.
So what will the bonds look like? Going back to the NTMA report, NAMA may well issue the securities itself. They would be guaranteed by the Minister of Finance. Under EC rules, gross General Government debt is what matters. Keeping NAMA out of General Government may be the difference between an Irish debt burden of 75% of GDP or 115% next year (although note that there will be assets on the other side of NAMA's balance sheet). Optics or not, the potential difference in the debt burden is worth highlighting."
Goodbody economist Deirdre Ryan comments: Consumer de-leveraging progressing, but at varying rates - - "The need for many developed economies to de-leverage is a theme we have commented on extensively. With consumer indebtedness at record high levels in a number of countries, not least Ireland, a reduction in spending levels and an increased willingness to pay down debt are trends we expect to feature for a prolonged period. However, developments are not occurring at a similar rate across all economies. In relation to the UK, in particular, we have not seen consumer spending wane to any significant degree. The latest indication of UK consumer resilience can be seen in the retail sales numbers for June, where volumes bounced 1.2% in the month, (-1% mom in May), while on an annual basis sales were up 2.8% (-2.0% yoy in May).
While the monthly spending numbers can be volatile, the overall outturn in Q2 retail spending in the UK was much improved on that seen in the opening months of the year; total sales volumes were ahead 1.1% in Q2, well ahead of the 0.7% rise in sales in the first quarter of the year. This contrasts greatly with spending patterns both domestically and in the US. In Ireland sales volumes dropped 17% in the quarter to May, while in the US retail sales fell 9.6% in the second quarter. Clearly UK consumers have managed to largely maintain their consumption patterns throughout the downturn. Consumer spending is likely to have made a more marked contribution to second quarter GDP in the UK, with the advance GDP estimate for Q2 to be released this morning. Nevertheless, given that many of the issues to be faced by UK consumers are similar to those to be faced elsewhere, questions still remain over whether this out-performance can continue."
Goodbody analyst Anna Lalor comments: NAMA may include foreign banks & majority Government bank stake “not inevitable” - - "The Irish Times reports this morning that NAMA is arranging that foreign banks not covered by the Government’s guarantee could participate in NAMA. ACC, which is owned by Rabobank, has made attempts to appoint receivers against a number of developers (most of which have large loans from the larger banks) in recent weeks, which has raised concerns that it could make the creation and workings of NAMA more complicated. At the end of December, ACC had a €5.6bn loan book, of which €3.3bn was commercial lending. The UK-owned banks operating here are participating in the UK Asset Protection Scheme and there is believed to have been some liaison between these banks, the Irish Government and representatives of the UK Government, so it is likely that some progress has been made on the interaction of both schemes to deal with impaired assets where there is exposure across developers. Danske indicated in its Q109 conference call that it “would have to think a lot” before it would consider whether it should be included. The Minister for Finance, when asked about ACC’s recent activity, indicated that “the legislation will address all the relevant issues”. He also noted that, based on the information he has seen so far, it is “not inevitable” that the Government would have to take a majority stake in AIB or BOI."
AIB and BOI will need to compile detailed plans and stress-tests for the EU - - "The European Commission yesterday released guidance on the restructuring of banks in receipt of state aid. The guidelines are in force until the end of 2010. For banks receiving state aid in excess of 2% of their risk weighted assets (which means that AIB, BOI and Anglo will probably have to comply, while NAMA will probably bring other banks under this umbrella), they will need to submit detailed restructuring plans regarding their viability to the EU. Participation in a Government guarantee scheme (as in the case of IL&P) is not considered to require the submission of a restructuring plan, but the Government will have to submit a viability review for such banks. Banks will have to show how they will return to long-term viability without state aid as soon as possible (with 5 years sounding like a maximum period allowed for restructuring), with long term viability seen as the ability to be profitable and provide an appropriate risk adjusted return on equity. NAMA will play some part in the restructuring of the banks, with the EU noting that ridding the banks of impaired assets constitutes restructuring.
Restructuring plans, which will need to include viability by business activity and profit centre, also have to show viability under stressed scenarios (including a protracted global recession). Options that may need to be considered by banks include the sale of the business or an orderly wind-up. Of relevance to AIB’s quoted holdings, while the EU mentions the sale of assets as a means of burden sharing by existing stakeholders, most of the focus on asset sales relates to disposals to prevent the distortion of competition, to maintain the long term viability of the bank or to focus on core businesses (but it highlights that this is not necessarily a reference geography). In fact, it notes that it would view positively measures that avoid “retrenchment behind national borders”."
