Central Bank warns economy could shrink by up to 14%

The Central Bank has said the economy could shrink this year by up to 14%, while it has also warned that unemployment could average as high as 17% this year. 

In its latest Quarterly Bulletin, the Central Bank also highlighted the risks to the economy of a no-deal Brexit. 

The Central Bank has said there is considerable uncertainty attached to its forecasts.

It believes GDP could fall this year by 9% under its baseline scenario and 13.8% under its “severe” scenario. GDP will not get back to 2019 levels until 2022.

It cautions that any recovery will still be tempered by precautionary behaviour and continued social distancing.

Labour intensive activities such as retail, food and beverage, accommodation, tourism and travel will be worse hit.

It points out that continued strong growth in the Information & Communications Technology (ICT) and pharmaceutical sectors have offset declines in other parts of the economy.

In the labour market, the quarterly bulletin forecasts that unemployment will remain between 14.5% and 16.6% this year.

It finds that at the peak of the Covid restrictions in mid-April, 72% of workers in the accommodation and food service sector were in receipt of the Pandemic Unemployment Payment (PUP) and over half of all construction workers.

Since then the number of construction workers on the PUP has declined by 42%.

However, very few jobs have been regained in the accommodation and food service sector with only an 8% decline.

This may improve after this week’s stage of reopening restaurants and bars.

The bank also notes a massive increase in savings.

Deposits were up €3.5 billion in April and €1.5 billion in May. This compares to monthly averages of just under €600 million pre-pandemic.

There has also been a corresponding decline in the demand for credit.

The glut of savings, the bank said, could provide a resource for a consumer-led recovery.

Early data from the start of June show card payments recovering close to 2019 levels after falling 30% in April.

Card use has been boosted by a decline in cash with ATM withdrawals down by between 40-50% year-on-year.

More companies are also developing an online presence, with a 40% increase in IE domain name registrations since March.

The bank notes the continuing uncertainty surrounding Brexit.

It says the immediate impact of a no-deal is hard to quantify but that over time, GDP could be reduced by between 3.5% and 5%.

It notes that the Covid-19 pandemic may have hampered firms’ efforts to diversify into new markets away from the UK and will also have made them more financially constrained.

“While additional policy measures may be required to give some impetus to recovery, it will be important, in due course, for the Government to provide for a clear and credible return to much lower and sustainable deficit and debt positions,” Mark Cassidy, Director of Economics and Statistics at the Central Bank said.

Minister for Finance Paschal Donohoe said the challenges Ireland faces are great in relation to incomes, jobs and peoples’ futures, but “we have the measure of it”.

He said the country faces a long and difficult journey, but “we will be able to complete it”.

Speaking on RTÉ’s Morning Ireland, Mr Donohoe said the PUP and wage subsidy schemes will not come to an abrupt end, but decisions will need to be taken by the Government.

He said no decision yet has been made on VAT for the hospitality sector.

He said everything is under review and that he understands how vital the sectors are to the economy.

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Number of insolvencies down 12% as Covid-19 impact not fully materialised

There was a reduction in the number of company insolvencies in the first six months of this year, according to new figures from Deloitte.

Today’s figures suggests that the impact of Covid-19 has not fully materialised. 

Deloittes said there were 273 company insolvencies between January and the end of June, a reduction of 12% on the same six month period last year. 

Although many companies – particularly in the retail and hospitality sectors – were closed for weeks or months, they have been assisted by state supports including the government payment schemes and the freezing of certain fixed costs. 

However, that situation is expected to change in the months ahead as businesses reopen and the state gradually withdraws the supports. 

David van Dessel, Financial Advisory partner at Deloitte, said insolvencies were expected to increase in the latter part of this year and next year. 

He appealed to companies experiencing challenging trading conditions to take early action so they can avail of the greatest range of options, including refinancing and restructuring  

“The sustained loss of trade (in recent months) will likely prove very damaging for many businesses and some will not be in a position to continue trading as a going concern,” Mr van Dessel said. 

In addition, mandatory social distancing measures as well as changes in consumer behaviour and sentiment will likely bring fresh trading challenges for businesses to overcome,” he said. 

“While the current insolvency numbers already indicate that the retail and hospitality sectors are experiencing more insolvencies than in previous periods, these numbers are expected to increase throughout 2020 and into 2021,” he warned.

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Irish services sector sees partial recovery in June

There was a partial recovery in the country’s services sector in June, according to AIB in its latest purchasing managers index.

The business activity index rose to 39.7 from 23.4 in May, a level consistent with ongoing weak activity in the sector.

The index measures activity on a scale of 1 to 100 with the 50 break even point separating contraction from growth in a sector.

The June report, however, saw gains for all sub-components, suggesting the most severe phase of contraction has passed.

There was also a marked improvement in the 12 month outlook, which turned positive having been at subdued levels over the previous three months.

AIB chief economist Oliver Mangan said stronger PMI data was expected from July onwards as the economy reopens.

“The June reading for Ireland is below the flash Services PMIs for the same month in the euro zone, UK and US of circa 47. This reflects the much more cautious approach of the Irish authorities to lifting lockdown restrictions compared to elsewhere,” he said.

“The July Service PMI data should capture the later re-opening of the Irish economy, especially in the hospitality industry,” he added.

The Services PMI had peaked at a two-year high of 59.9 in February.

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Spend yesterday approached pre-Covid levels – Revolut

Hairdressers, barbers, spas, chiropractors and dentists were among the big beneficiaries of the Phase 3 reopening of the economy yesterday, according to transaction data from Revolut.

Pubs and restaurants also got a boost from the restart of business, although to a lesser extent than the other big winners.

Excluding online shopping, overall spending yesterday by Revolut’s one million Irish customers across 15 categories was up 52% compared to average daily spending during the lockdown.

It was also almost back at average daily spending levels for the month before the Covid-19 pandemic led to severe restrictions to business activity across the country over three months ago.

Compared to a normal Monday prior to lockdown, the overall spend was up 23%.

Not surprisingly, high demand for personal grooming services resulted in a significant bounce in that sector, with spending by hairdressers and barbers up 72% versus the daily average prior to the arrival of restrictions.

Revolut says the data suggests that prices charged by hair and beauty providers increased only marginally, with customers spending an average of €37.81 in hairdressers and barbers yesterday, compared to an average before lockdown of €36.15.

Spending on spas was also up by nearly half compared to the average spend prior to restrictions being put in place.

But the picture was more mixed in the hospitality sector, with overall spending in pubs still less than half of the pre-lockdown daily average, although higher than an average Monday before the pandemic struck.

The requirement for customers to buy a meal worth at least €9 helped propel spending, with the average customer handing over €27.64 in the pub last night, compared to just €13.99 on an average night out before Covid-19.

Spending in restaurants though was less strong, coming in at a third of what would have been spent on an average night before the restrictions. 

It was also just over half of what would be spent on a regular Monday night before Covid-19.

Many people also used the lifting of restrictions as an opportunity to attend a dentist or chiropractor, with both services seeing a more than doubling in spend versus the period before the pandemic arrived.

When it comes to taxi use, spending was much lower than it was before the Government introduced restrictions, at around a quarter of average levels prior to restrictions being introduced.

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Covid-19 committee hears SMEs call for more Govt funding to survive

The Oireachtas Special Committee on Covid-19 Response has heard calls for more help for small and medium businesses affected by the pandemic.

The Chair of SME Recovery Ireland, John Moran, told politicians that small and medium businesses across Ireland are dying and need more funding to help them to survive.

In his opening statement, Mr Moran called for a €15bn bailout, including an immediate injection of liquidity worth €6bn to help small and medium businesses impacted by Covid-19.

Mr Moran said the Government’s response has been “too slow, too small and too expensive” and that existing schemes must be restructured as grant aid and not debt.

He said the Government’s July stimulus package must make lower cost liquidity available immediately for firms and include a major fiscal grant scheme.

Mr Moran told the committee that small and medium businesses need cash and not mountains of debt.

He said the economic epicentre of this pandemic has been SMEs, with 85% of businesses having closed to some degree, of which 34% shut completely during lockdown.

Mr Moran said the State is not getting ahead of the problem and does not appear to have a handle on the huge cost of the pandemic to the SME sector.

Jean McCabe, managing director of fashion retailer Willow Boutique, told the committee that many businesses are opening up with significant debt.

She said that the trading environment going forward would be very difficult and taking on more debt is not possible.

She said business owners in fashion are at their “wits end” about whether to continue trading or not because the challenges facing them are so great.

Ms McCabe said businesses need cash and liquidity now.

Representatives of the hotel, pub and restaurant sectors told the committee that employment supports should be continued, and be extended to seasonal workers, and that ongoing assistance with commercial rates is needed.

Chief Executive of the Vintners Association of Ireland Padraig Cribben said this period has been difficult for pubs and turnover in the industry dropped to zero and said there is no indication as to when “normal trading” conditions will return.

The Irish Hotels Federation said it is vital that the Temporary Wage Subsidy Scheme is continued and extended to include seasonal employees, with Chief Executive Tim Fenn saying additional Government measures on liquidity and competitiveness are also required to protect tourism livelihoods.

He called for a reduction in tourism VAT to 5% until December 2021 followed by a permanent restoration to 9% to assist recovery.

Adrian Cummins, Chief Executive of the Irish Hotels Federation, said the restaurant and hospitality sector was hit hardest by this crisis and it will take the longest to recover.

He warned that without immediate access to the TWSS, seasonal businesses, the mainstay of Irish Tourism, will not reopen.

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‘Lenders have responsibility to borrowers’ – BPFI

The chief executive of Banking Payments Federation Ireland has said it is not unreasonable for banks to look closely at applicants coming forward for mortgages and loans. 

Brian Hayes’ comments follow news of AIB’s stricter lending guidelines as a result of the impact of Covid-19. 

Mr Hayes said that lenders have a responsibility to borrowers. 

He said there is not a blanket ban across the industry and the different lenders make individual decisions.  

Brian Hayes said, in the interests of borrowers, banks have to look beyond the short term immediate situation of Covid-19 and ask if the applicant will be able to repay a long term loan.

4,000 mortgages have been drawn down in the last two months, he noted. 

Mr Hayes also said that banks have made it clear that there must be a regard for a change in circumstances between mortgage approval and drawdown. 

It is also the clear view of the Governor of the Central Bank of Ireland that it is in the interest of the borrower that there must be a full assessment before the mortgage is drawn down.

Mr Hayes said his advice to mortgage applicants is to shop around. 

The Central Bank said yesterday that the decision to grant or refuse an individual application for mortgage credit is a commercial decision to be made by the regulated entity. 

“A loan offer may contain a condition that the lender can withdraw or vary the offer if in the lender’s opinion there is any material change in circumstances prior to drawdown. In such cases, the decision to withdraw or vary the offer is a commercial decision for the lender,” the Central Bank said.

Earlier this month, Central Bank Governor Gabriel Makhlouf said that banks had a role to play in supporting customers during the Covid-19 crisis but that they must do so “in a sustainable way”. 

He also said he expected that banks would be making losses in the coming months and relying on built-up reserves.  

He described the financial system as “resilient” but added that that resilience was “not infinite”.

AIB said yesterday that at a time of unprecedented economic instability triggered by the Covid-19 pandemic, “it considers it prudent to review its mortgage lending policies”.

“It is imperative that the mistakes of the past are not repeated, that customers are not exposed to unnecessary risk and that their loans are sustainable,” the bank added.

Bank of Ireland said today that it continues to process mortgage applications for customers who are on the Covid-19 benefit schemes, provided affordability is not an issue. 

Where income has changed, the bank said it is liaising with customers to understand their updated circumstances and assess if these are expected to change again in the future.  

This process has always been followed where income changes for an applicant, as it would not be responsible to provide somebody with a mortgage at a level that they will struggle to afford, Bank of Ireland added.

Sinn Fein’s Housing spokesman Eoin O’Broin has called for several banks to end a blanket ban they have imposed on mortage applicants who are availing of the Wage Subsidy Scheme. 

Eoin O’Broin said that banks should take a more nuanced approach to this and to do individual assessments and deal with each case on its merits.

He said no one is asking the banks to break legislation regulations or to lend recklessly.

He said he has been contacted by constituents who are still in full time employment, with many receiving the same wage as before as alongside the Wage Subsidy Scheme, their wages are being topped up by their employer. This indicated that their employment is secure, he said.

Mr O’Broin said in some cases where people have had mortgage pre-approval, that pre-approval has been withdrawn. 

He said in two or three cases, people signed contracts and either the contract has been put on pause, or people have been told they can not proceed with the purchase until they had two Post Covid wage slips. 

He said in these cases, people have lost their homes.

People “are already deeply frustrated at the failure of banks to play their part,” he added. 

He also accused the banks of looking after themselves and not looking after the needs of their customers.

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Manufacturing bounces back to pre-pandemic growth rate – PMI

The manufacturing sector returned to growth in June after recovering almost all of the sudden deterioration seen following the coronavirus-related shutdown of most of the economy in March, a survey showed today. 

The economy here has opened more gradually than much of Europe with large parts of the services sector including hotels, restaurants, hairdressers and most pubs only resuming trading this week.

A number of factories here reopened in June, the AIB IHS Markit manufacturing Purchasing Managers’ Index (PMI) survey found.

That helped push the index up to 51 from 39.2 in May, back above the 50 mark denoting growth. 

The record one-month gain was driven by a near doubling in the largest sub indices of new orders and output, with exports also rising at the fastest level since April 2019. 

The main index hit a low of 36 in April and stood at 51.2 in February before Ireland reported its first coronavirus case on February 29. 

Flash sister surveys in June for the UK and the euro zone as a whole showed similar rebounds to 50.1 and 46.9 respectively. 

However higher production was not matched by a rise in employment in June, with one in five firms cutting staff, albeit down from 29% in May and 41% in April, the survey showed. 

CSO figures yesterday showed that 22.5% of the workforce here were either temporarily or permanently unemployed at the end of June, down from a record 28.2% in April.

AIB’s chief economist Oliver Mangan said the return to growth was a clear indication of improving economic conditions but that many of the indices remained weak relative to their long-run averages. 

“Manufacturing conditions have not returned to normal. The collapse in orders in the March-May period means that backlogs continued to fall sharply, while inventories of finished goods shrunk further, with stocks of inputs also still in marked decline,” he said.

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Euro zone factory downturn eased in June as lockdowns loosened

The downturn in euro zone manufacturing was not as bad as initially thought last month after more economies in the bloc eased restrictions imposed to quell the spread of the coronavirus. 

Over 10 million people have been infected by the virus globally and more than 500,000 have died.

This lead governments to impose lockdowns and force businesses to temporarily close and citizens to stay at home. 

But with transmission rates falling in much of Europe, and economies opening up, IHS Markit’s final Manufacturing Purchasing Managers’ Index (PMI) moved closer to the 50-mark separating growth from contraction in June. 

It registered 47.4 last month, up from May’s 39.4 and comfortably ahead of an earlier flash reading of 46.9. An index measuring output jumped to 48.9 from 35.6. 

“The final PMI numbers for June add further to signs that the euro zone factories are seeing a strong initial recovery as the economy lifts from Covid-19 lockdowns,” said Chris Williamson, chief business economist at IHS Markit. 

“Expectations for the year ahead have also rebounded sharply as hopes grow that the economy will continue to find its feet again in the coming months,”  he added. 

The future output index, which gauges optimism about the coming 12 months, bounced back into positive territory at 57.3 from May’s 44.6. 

However, all other indexes remained stubbornly below the breakeven level, suggesting any recovery might be slow and long. 

A June Reuters poll predicted the bloc’s economy contracted 12.5% last quarter but would expand 7.9% and 3.1% this quarter and next, respectively.

To combat the historic downturn the European Central Bank has expanded its pandemic-related bond purchases to a total of €1.35 trillion and 31 of 41 economists in the Reuters poll said the ECB was not yet done with new policy announcements.

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NTMA due to hold two bond auctions in third quarter

The National Treasury Manangement Agency said today it plans to hold two bond auctions in the third quarter of this year.

The NTMA said it will hold bond auctions on July 9 and September 10.

The agency is also planning three Treasury Bill sales and these are pencilled in for July 16, August 20 and September 17.

The NTMA continues to move towards its annual funding target of up to €24 billion to shore up government finances to deal with the coronavirus pandemic.

It has raised €18.5 billion from bond issuance so far this year.

In April, the NTMA announced a revised bond funding range of €20 billion to €24 billion for the full year, to meet the extra borrowing requirements of Government measures during the Covid-19 pandemic.

That replaced the original bond funding range, announced in December, of €10 billion to €14 billion.

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CCPC tells businesses to act independently on prices

The Competition and Consumer Protection Commission has warned businesses that despite economic challenges, they must act independently in their commercial decisions, especially when setting prices and charges. 

The warning comes on the back of engagement between the CCPC and a number of trade associations after they made public statements about new potential charges and price increases, which their members may apply.  

The Commission also reminded businesses that they have additional responsibilities under consumer protection law, when setting new or additional fees, or making changes to business practices.

It said the practice of trade associations suggesting future prices, or coordinating ways of passing on costs to consumers, could constitute an infringement of competition law.

Isolde Goggin, chair of the Competition and Consumer Protection Commission, said the CCPC is acutely aware of the new challenges that businesses across the country are facing at this time due to Covid-19. 

But she said that businesses must be mindful that the rules set out by competition law remain unchanged. 

“Whilst the CCPC recognises the importance of businesses and representative bodies working collaboratively in such unprecedented circumstances, it’s important for them to know that competition law still applies, even during a global pandemic,” Ms Goggin said.

“We remind all representative bodies that they must not attempt to co-ordinate the pricing decisions of their members. To do so could be detrimental to consumers and in breach of competition law,” she stated. 

“As the economy starts to re-open, we are closely monitoring the activities of businesses and similar representative organisations and, if necessary, the CCPC will take appropriate action to deter or stop any potentially anti-competitive behaviour,” she cautioned.

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