Business News

Debt costs up for business despite ECB rate-cut talk

Debt costs up for business despite ECB rate-cut talk

Borrowing costs for small and mid-sized businesses in Ireland increased in the first three months of the year, despite the wider speculation in the economy that interest rates will fall.

Irish SMEs already pay some of the highest borrowing costs in Europe.

The latest Central Bank data on credit for small and medium enterprises (SMEs) indicates that firms remain extremely cautious about borrowing.

Despite Ireland having one of the fastest-growing economies in the EU, gross new lending to Irish-resident SMEs slowed to €1.1bn in the first quarter of 2019 from the previous quarter’s €1.5bn flow.

Debt repayments exceeded new lending to all Irish SMEs by €397m in the period.

Nervousness ahead of Brexit, originally scheduled to happen on March 31 is likely to have been an issue, according to Investec Ireland chief economist Philip O’Sullivan.

“When set against the backdrop of heightened Brexit uncertainty and international trade spats, it is not a surprise to see that Irish SMEs adopted a defensive posture with regard to leverage in the opening months of 2019,” he said.

Of the 15 segments of SMEs tracked, only three saw an increase in new lending activity.

Even so, the credit data suggests the economy is performing highly despite continuing to deleverage, he said.

Borrowing costs are rising, however.

The weighted average interest rates on outstanding SME loans increased slightly in the first quarter of this year to 3.51pc.

New lending rates are higher, and now stand at 4.14pc for new drawdowns with the highest costs in sectors including agriculture and transport/storage that are likely to be on the economic front lines in the event of a no-deal or crisis Brexit.

The rise in the cost of debt for businesses is in contrast to the declining cost of credit to lenders.

The ECB’s indication that monetary policy is set to become even looser, with potential interest rate cuts on the way, has pushed down borrowing costs on capital markets.

Borrowing costs were already low for the banks.

Last year the main banks stopped using the State’s Strategic Banking Corporation of Ireland (SBCI), which was set up to channel low-cost finance to SMEs, because the lenders were able to access cheap money in their own right.

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Bank of Ireland’s chief finance officer to step down

Bank of Ireland’s chief finance officer to step down

Bank of Ireland has announced that its chief financial officer, Andrew Keating, is to leave the bank.

Mr Keating, who has worked at the bank since 2004, is set to take up a “senior finance role” in an “international organisation outside the financial services sector”, the bank said in a statement.

It said he would step down as CFO and executive director of Bank of Ireland Group by the end of the year, having served in the roles since 2012.

Bank of Ireland said a process to appoint his successor would now begin.

In its statement Bank of Ireland’s CEO Francesca McDonagh said Mr Keating had “demonstrated a strong track record of successful financial leadership” during his time as CFO and had “built a market leading finance function” within the lender.

“I wish to acknowledge Andrew’s strong support to me in my role as Group CEO and wish him every success in the next phase of his career”, she added.

Bank of Ireland chairman Patrick Kennedy said Mr Kenny had “been a key member of the Board and Group Executive team” in recent years and wished him well for the future.

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Ireland runs risk of austerity-era spending cuts, economist to warn politicians

Ireland runs risk of austerity-era spending cuts, economist to warn politicians

Politicians will be warned today that Ireland runs the risk of austerity-era spending cuts if it continues with existing expenditure plans.

Stephen Kinsella, Associate Professor of Economics at University of Limerick, will address the Budget Oversight Committee on the same day as the Government publishes its Summer Economic Statement.

In his opening remarks, Mr Kinsella will call on politicians to introduce fiscal tests to deal with volatility in tax revenues.

He will tell TDs and senators that: “Ireland risks replaying the 2007-9 period of dramatic cuts to public expenditure on its current forecasted path of spending increases.”

Mr Kinsella will call on politicians to introduce automatic rules that would set “ceilings and floors” on spending to deal with increased volatility.

He will say that the “time to implement this methodology is now when the State’s finances are strong”.

Ireland needs a more robust fiscal system to withstand economic shocks, Mr Kinsella will say.

This system should comprise a medium-term strategic arm, an accounting and verification arm, and the annual budget cycle.

“One key tool in discovering where we are weak is the fiscal stress test.”

Such tests examine the effect of spending increases at the same time as drops in tax revenue and calculate the additional amount the State will have to borrow.

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Government to borrow to cushion impact of hard Brexit

Government to borrow to cushion impact of hard Brexit

October’s Budget will involve a package worth €2.8 billion, Minister for Finance Paschal Donohoe said as he published the Government’s Summer Economic Statement.

However, €2.1 billion of that is already committed to current and capital spending plans, which leaves just €700m to be allocated on budget day on 8 October.

This is three weeks before Britain is due to leave the European Union.

The Summer Economic Statement also targets a budget surplus of 0.4% of GDP as being appropriate to an economy at the top of an economic cycle.

However, the Budget also has to account for the possibility of a disorderly, or no-deal Brexit, which is expected to deliver a severe economic shock to the economy.

In that case, the Government proposes to spend more on social welfare provisions and targeted support schemes.

Along with the loss of revenues associated with an economic shock, the Government is planning to borrow funds to pay for extra spending.

This would result in a deficit on between -0.5% and -1.5% of GDP, depending on the size of the economic shock.

A decision on which case will become the central scenario for planning October’s budget will be taken in September, when more information will be available to the Government concerning the Brexit situation.

“The external environment is becoming increasingly challenging, and at this point in time a disorderly Brexit is a real possibility,” Minister Donohoe said.

“That is why I am setting out two budget scenarios in this SES – the first involving an orderly Brexit occurring, while the second involves a disorderly scenario.”

The Summer Economic Statement said the “appropriate budgetary strategy must be to avoid further inflating the economy and, concurrently, build up resources which can be deployed in the event of the UK leaving the EU without a trade agreement at the end of October”.

“In summary, the economy is caught between possible overheating on the one hand and the very real possibility of a disorderly Brexit on the other hand,” it said.

It added that budget policy must take account of the fact that “the virtual attainment of full employment means the budgetary policy must lean against the wind, it must be counter cyclical so the mistakes of the past must be avoided”.

The Minister for Finance said the Government this year was targeting a surplus of 0.2% of GDP and a surplus of 0.4% for next year.

Speaking at today’s press conference, he said the Government was outlining two different scenarios for the country, but one Budget.

Mr Donohoe said the first scenario outlines what the economy will look like in the event of an orderly resolution to Brexit – an extension of current arrangements for the UK’s trade relationship with the EU.

He said that will result in an environment of continued growth.

The second scenario outlines what will happen in the event of a no-deal Brexit and Mr Donohoe said this builds on the Stability Programme Update published in April.

He said from an economic point of view we would have an economy that instead of growing 3.5-3.75% next year would grow by just 0-1%.

He also said the Government believes the early years of Brexit would result in 50,000 jobs being lost, which he described as a major challenge.

To respond to this, Mr Donohoe said the Government would allow its finances to move into a deficit position to deliver two really important goals.

The first of these is to ensure that we have the resources to meet the needs of citizens who lose their jobs as a result of Brexit, the so-called Automatic Stabilisers.

He said the type of supports that are available through our social welfare and taxation system will be maintained.

The second goal is that the Government will ensure that the parts of the country and economy that need resources will have them to get through the Brexit period.

He said the resources available will be along the lines of those suggested by the Fiscal Advisory Council.

This would put in place resources for demographic change, commitments to public servants and money to go ahead with a planned increase in capital spending next year of €700m.

The minister said the Government this year increased capital spending by 24%.

“We will increase that investment by a further €700m to continue the work we have started to ensure our economy gets what it needs and ensure additional spending at a time of an economic shock,” he said.

That will leave €700m of unallocated resources and it will be up to the Cabinet to allocate that sum, and indicate how that sum could grow if it introduces further tax measures to raise revenue, he added.

“If we have an orderly Brexit we will target a surplus of 0.4% of GDP. In the event of a no-deal Brexit we will run a deficit to be determined on Budget day,” the minister stated.

“We are giving our best judgement at this point in time of the scenarios we will have to grapple with in the autumn. The budget parameters I believe are the safest parameters for dealing with those scenarios,” he added.

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Second-hand property prices continue to drop in Dublin – survey

Second-hand property prices continue to drop in Dublin – survey

Second-hand property prices in Dublin have decreased by an average of €4,500 in the past three months, a survey has found.

The Real Estate Alliance survey found the average house price for a three-bed semi-detached house in Dublin stands at €433,000, for the second quarter of 2019.

This is a second consecutive quarter fall (-1%) since the end of March, and 2.2% decrease compared to June 2018.

The average semi-detached house nationally now costs €236,028, a rise of 0.05% on the Q1 2019 figure of €235,898.

Overall, according to the survey, the average house price across the country rose by 1.54% over the past year – a decrease on the 2.96% recorded to March – and an indication that the market is continuing to steady after an 8% overall annual rise to June 2018.

The report said increased availability of new homes has had a suppressing effect on prices in some commuter areas such as Kildare, north Wicklow and Meath.

Prices in the country’s major cities outside Dublin were “relatively static” with no change in Limerick and Galway due to “an increase in supply and new home developments”.

Cork city showed a slight rise of 0.8% to €320,000 while Waterford city had a quarterly increase of 2.4%, with tightening supply rising prices to €215,000, up €5,000 from the end of March.

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Global demand for agri-products set to increase by 70%

Global demand for agri-products set to increase by 70%

A senior lecturer in retail management has said food sustainability is becoming more prominent and by 2050 global demand for agricultural product is set to increase by 70%.

The global focus on climate means many people are thinking about where food comes from and how much is thrown away each week.

Damian O’Reilly who lectures in Technological University said: “Retailers all have sustainability on their agenda, but getting it into practice is the problem”.

Speaking on RTÉ’s Morning Ireland, he said the large supermarkets work with huge supply chains – sometimes they can be very short chains because they are dealing with fresh produce, which goes off quickly – so daily decisions are made and they are not taking sustainability into account.

Aside from retailers, some restaurateurs are taking food sustainability into account when catering for the public. Food Space Ireland operates a number of workplace canteens around the country.They have recently opened their first public-facing restaurant, Ink in Dún Laoghaire.

Culinary Director Conor Spacey said their zero waste ethos, which includes pickling vegetable peelings, brining and brewing their own drinks can be transferred to our own homes.

He describes how he used left over strawberries from the kitchen to make Kombucha.

“There’s a bit of a craze about Kombucha right now. It’s a fermented tea that’s flavoured to make a fizzy drink which is said to have health benefits because of the probiotics that emerge in the fermentation process.”
That process uses a Symbiotic Culture Of Bacteria and Yeast (Scoby). More than one Scoby and you have a ‘Scoby hotel’

Conor says there is a reason we do not use the methods previous generations did to preserve food, such as pickling and fermenting.

It is, he says, because we have lost the connection to food. He describes how people do not put value on food, citing the example of throwing produce out of the fridge because it might be gone off to make room for the new groceries.

Despite there being lots of Irish produce available to buy in supermarkets this time of year, fruit and vegetables from other countries are still on the shelves of our supermarkets.

Damian O’Reillly explained how it currently makes sense for big supermarkets to buy from some countries such as onions from Egypt, which can produce huge amount of the vegetable so the volume for one order is more economical for them.

However, he does point out the good economics in buying local, which he describes as the “local multiplier effect”.

“If you were to spend €100 on something online from the UK, and had it shipped here, that money stays in the UK. If you spend it on local produce, that €100 stays local because the people who produce buy local ingredients, they pay local people, and that money then gets spent in the shops, pubs, businesses and so on”.

He said the local multiplier effect is incredibly strong because it means the local €100 spent is actually worth €500 in the local economy.

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Revenue owed €40m in tax, fines and interest by defaulters

Revenue owed €40m in tax, fines and interest by defaulters

More than €39.82m remains unpaid to the Revenue Commissioners in taxes, penalties and interest from published tax defaulters in 2017 and 2018.

That is according to figures provided by Finance Minister Paschal Donohoe which show €15.5m remains unpaid by published tax defaulters in tax, penalties and interest from last year.

In a written Dáil reply to Labour’s Joan Burton, Mr Donohoe confirmed that a further €24.2m remains unpaid in taxes, penalties and interest from the 2017 lists of published tax defaulters.

The figures show that of the 265 tax settlements agreed last year with defaulters, the numbers that remain unpaid amount to 79 or 30pc of settlements.

This compares to 289 settlements agreed for 2017 where 101 settlements remain unpaid or 35pc of the overall total.

Ms Burton said: “I’m very shocked at the level of non-payment of tax settlements.” She said: “It is very unfair on the hard-pressed taxpayer that some of these tax defaulters can seemingly walk away from their obligations.”

A spokeswoman for Revenue said while Revenue vigorously pursues collection/enforcement of unpaid settlements “in some cases, the collection/recovery of the full amount unpaid will not be possible”.

“In some instances for example, a company may have gone into liquidation, while a number of the unpaid settlements in the Tax Defaulters List are as a result of the taxpayer claiming ‘inability to pay’,” she said.

Documentary evidence of inability to pay must be submitted to Revenue, with each case then considered on its own merit, as to whether an ability to pay exists or not.

Revenue currently has 500 people employed in all aspects of debt management.

The spokeswoman said: “In 2018, we collected €211.6m as part of our debt collections and enforcement actions. We can, and do, work very successfully with businesses and individuals who engage early with us to resolve their payment difficulties.”

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Global stocks hold highs in rate-cut bet

Global stocks hold highs in rate-cut bet

World stocks held near two-week highs as investors bet on a worldwide wave of central bank stimulus, with expectations growing that the US and the eurozone may deliver interest rate cuts as early as July.

Markets have been fired up by European Central Bank president Mario Draghi’s Tuesday volte-face on policy easing. In one of the biggest policy reversals of his eight-year tenure, Draghi flagged more easing if inflation failed to pick up.

But some caution seeped in after the previous day’s frenzy.

German and US bond yields, which hit record lows and two-year lows respectively after Draghi’s comments, inched around three basis points higher on the day.

European shares slipped off six-week highs and Wall Street futures indicated a slightly weaker opening on Wednesday.

Some of the trepidation is down to expectations that US Federal Reserve would follow the lead of the European Central Bank and open the door to future rate cuts.

“We see now that central banks will try assertively to generate inflation so this would reinforce our positivity on risk assets overall,” said Justin Onuekwusi, portfolio manager at Legal & General Investment Management.

Market sentiment has been buoyed also by news that Trump will meet Chinese leader Xi Jinping at the G20 summit this month, even though many doubt the two men can reach a breakthrough on ending their trade dispute.

MSCI’s global equity index rose 0.4pc, adding to Tuesday’s 1pc gain, as Asian shares excluding Japan followed the lead of their European and US counterparts to jump almost 2pc – their biggest one-day rally since January.

Tokyo and Shanghai also climbed almost 2pc while Australia’s main bourse hit an 11-year high. New York’s S&P500 jumped almost 1pc on Tuesday to approach recent record highs.

All eyes are now on the Fed, with chairman Jerome Powell holding a news conference after the announcement.

As for Europe, markets have almost fully priced a cut in September, though some analysts, such as those at Germany’s Commerzbank, now say rates will be cut as early as July.

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Wage rises slow down below rest of the EU

Wage rises slow down below rest of the EU

The pace of wage growth in Ireland slowed dramatically to 2.2pc between January and March, under-performing the eurozone average for the first time since early 2017.

Meanwhile, the level of job vacancies here was the third lowest in the currency bloc, indicating the economy may not be overheating.

The data released by European Statistics agency Eurostat showed wage gains here have fallen off dramatically since the final quarter of last year when they came in at 3.2pc. This was seen as a sign the economy was getting close to full employment.

In the first quarter of this year, wages in the eurozone as a whole rose by 2.5pc, a 10-year high.

“The country breakdown shows much of the increase in wage inflation was in the economies which have been struggling for the past year or so,” consultancy Capital Economics said.

Momentum

“In practice, we think labour cost growth is more likely to be stable in the coming quarters, given the loss of momentum in the economy and the evidence from business surveys that the labour market is no longer tightening.”

A separate release from Eurostat showed job vacancy rates here stood at 1pc, well below the 3pc average in the euro area, another measure suggesting demand for labour looks to be slowing.

The economy here is expected to grow by around 4pc this year, unless there is a hard Brexit, down from 6.7pc in 2018.

Over the course of 2018, some 63,000 jobs were created on a net basis and the Department of Finance is expecting 50,000 new jobs will be created this year.

There are still skills shortages in healthcare, finance and engineering, according to a new study by the Central Bank of Ireland and jobs website Indeed.ie.

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Tax rises needed to prevent economy overheating – ESRI

Tax rises needed to prevent economy overheating – ESRI

The Economic and Social Research Institute says the economy is now growing so strongly that the Government should increase taxes to avoid overheating, notably through increasing taxes on carbon and property.

But it also says the Government should avoid tax increases if there is a no-deal Brexit.

In its latest quarterly bulletin, the ESRI says the economy should grow by 4% of GDP this year and 3.2% next year.

It expects unemployment to average 4.5% this year, falling to 4.1% next year.
Private consumer spending is expected to grow by 2.5% and 2.3% respectively, but Government current spending will grow by 7% this year and 5.3% next year.

Investment is forecast to grow by 7.1% this year and 7.6% in 2020, while inflation is expected to be 1.4% and 1.7% in those years.

The Irish economy is growing strongly and is probably performing at full capacity.

Unemployment is down to 4.5%, wages are growing at about 4%, and the Government is spending more, especially on a very large investment programme.

Such is the pace of spending and output growth, the ESRI says the Government ought to take some of the heat out of the economy by raising taxes, particularly carbon tax and property tax, leaving taxes on labour alone so as not to harm employment.

The authors write: “Given the expected increase in capital expenditure over the short to medium term, it may be advisable to run an explicitly counter-cyclical fiscal policy and instigate a mildly contractionary budget.

“Taxation increases in the area of carbon taxes or residential property taxes could be used to reduce some of the demand – side pressures which are now evident in the domestic economy.”

It also warns that the planned increases in the Government’s capital programme for building infrastructure needs more careful management.

It said avoiding cost escalations such as the National Children’s Hospital, requires “improvements in the process of overseeing such projects are required” to ensure the initial estimates of the project costs are much closer to the final costs.

But these projections assume Britain stays in the EU. In the event of a no-deal Brexit, the economic shock will cut the growth rate by about two thirds.

Indeed, the ESRI says the prospect of Brexit is already having an impact on the economy by depressing consumer confidence and spending.

It says the usual determinants of consumer sentiment, notably unemployment and inflation, are both extremely low, and cannot account for the sharp deterioration in consumer sentiment observed over the past eight or nine months.

Given the past data on the link between sentiment and spending behaviour, the ESRI believes the economy has already been adversely affected by the amount of attention on Brexit and the uncertainty surrounding it.

If there is a no-deal Brexit, it says contractionary budget policy would have to be abandoned in favour of measures to support the economy.

All of which makes framing October’s Budget extremely difficult.

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