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Markets News Monday: Irish economy to emerge from recession in next 3/4 months; Oil rises to $81 in New York; Four Irish firms going bust every day
By Finfacts Team
Jan 4, 2010 - 10:05:22 AM
A worker vacuums pine needles after a Christmas tree was removed from the Oval Office, December 30, 2009. The President was in Hawaii, where he once lived.
Global stock markets were boosted by government support programs across to world in 2009 with Russia, Brazil, India and China, the best big market performers. The decade has been the worst for US stocks, since the 1820's and regional indexes in Europe and Asia also show decade declines.
Ireland's ISEQ share index rose 27% to 2,975 in 2009, compared with a 66% slump in 2008. The measure returned to its April 1997 levels and is now at 30% of the February 2007 record peak. Global building materials supplier CRH accounts for 34% of Irish market capitalisation.
"The Irish economy gradually stabilised throughout 2009. Note that the majority of the damage was done in the year to Q1 2009, a period when GNP fell 13% in volume, consumer spending dropped 10% and the budget deficit exploded. Since Q1, there have been a number of more positive developments.
GNP declined 3.1% in volume in the following two quarters, and the drop in Q3 was the smallest since Q1 2008 (see chart below). The recession has continued, but it has been a slow grind lower in contrast to the collapse witnessed in the year to Q1 2009.
The 2009 budget deficit was cut by at least 5% of GDP compared with a 'no-policy-change' situation. In addition, the government sent a strong signal internationally by making the tough political decisions to cut public sector pay (twice) and reduce social welfare benefits.
The government introduced a plan to restore the solvency of the banking system by setting up the National Asset Management Agency (NAMA).
Looking ahead to 2010, the economy is set to exit from recession in the first six months. However, the recent data flow has been slightly disappointing. Having inched back towards 50, the recent survey indicators have not kicked on. 'Core' retail sales dipped below the April low in October, although industrial production in the multinational sector remains robust. We expect the high frequency indicators to progress enough in early 2010 for the economy to bottom by March or April.
But it is worth making a point here: nominal variables matter greatly for credit growth and for tax revenue. Nominal GNP is likely to fall due to price deflation in consumer goods, government service provision and investment in buildings, machinery and equipment.
Yet Ireland has not got the credit for the tough austerity measures it has taken. As the first quarter of 2010 progresses, fixed income investors are likely to increasingly differentiate between those countries that have stabilised their long-term debt dynamics and those that have not. Irish spreads have converged steadily (having blown out in Q1 2009) with the German benchmark due more to the increase in global risk appetite since March. That convergence is likely to continue, but this time it will be due to cognisance of the fiscal retrenchment path that the state has taken. We would expect investor sentiment to improve as the economy begins to grow again and the realisation dawns that the solvency risk has been minimised. That will also benefit the Irish equity market in time.
Look out for the reaction of Irish households to be one of the surprises of 2010. The savings ratio soared in the 18 months to mid-2009 as a consequence of rising unemployment, the desperate fiscal position and the loss of household wealth. But the savings ratio (at 12%) has now reached a level not far behind the EU-27 (average of 14.4%) and has probably overshot for two reasons: (i) Ireland's demographics are more favourable based on the life cycle theory of consumption, and (ii) the spending culture is not quite in line with Europe, albeit it has moved in that direction. We think that a savings ratio in between the UK/US and continental Europe on the other side of the spectrum is more natural.
Two factors may lead to some easing in precautionary savings. The unemployment rate is peaking, and the fiscal position has improved (households may no longer feel the need to save more now to pay back higher taxes in the future). We forecast that the savings ratio will inch about two percentage points lower in 2010-2011. Disposable income will probably start to grow by H2 2009; if this development coincides with a gradual easing in saving, then consumer spending will reach a favourable turning point.
The risks to the more positive outlook for 2010 are three-fold in our view:
First, the banking resolution may be delayed or could falter. If the loan transfer to NAMA drags out or recapitalisation becomes problematic, it will restrain credit provision.
Second, Ireland cannot afford the global recovery to slip significantly, given the still fragile domestic environment. But our baseline case is that global recovery becomes sustainable as the second-round effects such as business investment kick into gear.
Third, rising interest rates (both short and long term) remain a threat. The European Central Bank may decide to normalise rates more quickly than we anticipate (two rate hikes of 25 basis points in H2 2010), or Irish banks may get the balancing act wrong by increasing (currently low) margins too quickly on mortgages and business loans. In our base case, disposable income will be expanding again (albeit moderately) in H2 2010 when rates start rising so that households can cope. A sustained global bond market sell-off, pushing up the cost of Irish funding and long-term interest rates for business, would be very damaging."
Irish company failures
Four companies went bust every day last year, according to InsolvencyJournal.ie, which forecasts that the year ahead will not be much better.
Overall, 1,400 Irish companies were declared insolvent in 2009, an increase of 82% on the previous year and up 287% on 2007.
The worst hit were the construction, services and retail sectors with well-known names such as Smart Telecom, Chartbusters and O'Brien's Sandwich Bars, among the casualties.
The Burj Dubai, now the world's official tallest building, opened in Dubai Monday. "Now we are looking at an achievement … that coincides with the largest property bubble that Dubai has seen," Saud Masud from UBS told CNBC Monday:
Paying Taxes
Paying Taxes, a study from Big 4 accounting firm PwC and the World Bank Group, measures the ease of paying taxes across 183 economies worldwide by assessing both the cost of taxes and the administrative burden of tax compliance.
The current study was conducted against the backdrop of a global recession, which has meant falling tax revenues around the world, and the need for governments to make difficult tax policy choices. Despite this, it is clear from the study that tax reform remains high on governments’ agendas.
The Paying Taxes study is part of the World Bank Group'sDoing Business project, which aims to provide a quantitative measure of the regulations applying to domestic, small- and medium-sized enterprises, using 10 business factors - including paying taxes.
Using a consistent set of assumptions, Paying Taxes looks at the tax systems in 183 economies, to assess how they apply to and affect a standard case-study company. The objective is to ensure that the results can be measured on the same basis for each economy, which enables comparisons to be made.
The study provides quantitative data to inform and stimulate discussion, enabling governments to benchmark their tax systems against others, and to identify possible priority areas for reform.
The study give a 6th ranking to Ireland and found that Ireland has the second lowest overall business tax rate in Europe at 26.5%. The lowest is Luxembourg at 21% and the highest is Italy where overall business taxes amount to 68%.
Asian economies are going to expand quite strongly over the next six to 12 months with China and India leading the pack, Khiem Do from Baring Asset Management told CNBC Thursday. Bob McKee from Independent Strategy joined the discussion:
Asia
General Motors Co. reported a 67% jump in 2009 China sales, signalling the importance of Asia to GM after it-emerged from bankruptcy.
GM, the largest overseas carmaker in China, sold 1.83 million vehicles in the country in 2009, it said Monday. Its market share rose 1.3 percentage points to 13.4%.
Manufacturing PMI reports showed strong growth in Japan, China and India in December with Japanese export sales boosted by strong demand from China - - see link to report in box below.
The Morgan Stanley Asia Pacific Index rose 0.8% Monday.
The Nikkei 225 added 1.03%; China's Shanghai Composite dipped 0.21% and India's BSE Sensex 30 index rose 0.64%.
In Europe, the Dow Jones Stoxx 600 advanced 0.79% Monday.
The ‘teens’ decade opened strongly with Swiss-based drugs group Novartis announcing it was buying a majority stake in compatriot Alcon,in a deal worth $39.3 billion.
In Dublin, the ISEQ is up over 2%.
Market cap leader CRH has risen 1.84%, in advance of Tuesday's trading statement.
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.
Bloomberg says for clues to why the dollar is gaining strength after its worst year since 2007, look no further than Japan.
While Fed funds futures show the Federal Reserve may raise interest rates as soon as August, the Bank of Japan is likely to keep borrowing costs near zero percent through 2011 as deflation persists, according to the median estimate of economists surveyed by Bloomberg. Betting the dollar will appreciate versus the yen is the top 2010 recommendation at UBS AG, the second- largest foreign-exchange trader.
For the first time since before credit markets began to seize up in 2007, investors are starting to favor selling the yen instead of the dollar to fund higher-yielding investments. The European Central Bank, grappling with debt crises in Greece, Spain and Ireland, may wait until at least October before increasing borrowing costs, a separate survey shows.
Goodbody chief economist comments: Economic View; Ireland in 2010 – A lot done, more to do! - - "A particular Irish political party once had an election slogan which read “A lot done, more to do”. Comparing where Ireland stood at this time last year with where it stands now, this seems like an apt description of the current situation. Entering 2009, Ireland faced immediate problems in the form of the (in)stability of the banking system and the funding of a large and growing budget deficit. After the nationalisation of Anglo Irish Bank, the injection of preference shares in the two big banks and the process of setting up of the National Asset Management Agency (NAMA) throughout the year, the process by which stability is restored to the banking system is well advanced, but far from complete. Recapitalisations, the “third force” and the actual transfer of assets to NAMA will be the priority throughout 2010. Success will be judged on whether credit supply is restored to normal.
We learned over the Christmas period that Finance Minister Lenihan has a different, personal challenge to face in 2010. In his role as Finance Minister over the past twelve months though, he has managed to stabilise the fiscal situation and set in train a process which should reduce the budget deficit, which hit close to 12% of GDP in 2009, to more sustainable levels over the coming years. The decisions taken in Budget 2010, particularly the decisions to reduce the public sector pay bill and social welfare spending, were political dynamite, but they were done to safeguard the Irish sovereign. In the opinion of the markets, Ireland has distinguished itself from Greece, which is going through its own problems, and should the resolve and political will continue, spreads on Irish Government bonds relative to the rest of Europe should continue to reduce.
The situation on the ground in the Irish economy is still challenging, of that we can have no doubt. However, pre-requisites to a growing economy are a fully-functioning banking system and stable public finances. On both counts, 2010 should see a continuation of the progress made in 2009."
