Rising exports boost Ireland’s GDP by 7.8% in Q1 while the G7 reveal plans for a global minimum corporate tax rate of 15%. Domestic hospitality spending is up according to Revolut data and Dublin commercial real estate sector sees an acquisition of c. €160 million. All these stories and more are covered in this week’s insights update from BlackBee.
On Saturday, the G7 revealed an initial agreement to a global minimum corporate tax rate of 15%. While higher
than Ireland’s existing 12.5% corporate tax rate, this will not be as bad as first feared by the Irish Government as
only two months ago Fed Chair Janet Yellen suggested a 21% global corporate tax rate. Further tax reform
negotiations will take place at the G20 summit later this year. The May readings for various Purchasing
Managers’ Indexes around the world formed the centrepiece of the latest updates on the world economy last
week. The vast majority of readings pointed to persistent strong momentum in the global economy with
readings over 60 the norm (any reading over 50 indicates a growing economy). The other big data release of
interest to investors last week was the May employment report in the US, particularly since the number of jobs
created the previous month was behind expectations. Although the 560,000 jobs created in May was slightly
behind expectations, equities and bond markets took the number in their stride – perhaps helped by the
thought that a slightly weaker number could take some heat out of the recent chatter about the Fed changing
In Ireland the CSO published the first quarter national accounts last week. Despite the economy being ‘locked
down’ for the entire quarter, it incredibly still managed to grow by 7.8% in GDP terms – highlighting again how
GDP cannot capture the full Irish economic picture. The breakdown contained in this week’s Chart of the Week
does however show the main underlying patterns and why GDP actually rose. Domestically oriented sectors
such as personal spending and investment were well down in Q1 (reflecting the lockdown) with overall activity
being helped by great government spending and trade in particular. The rise in our exports in Q1 (thanks to
their defensive nature) coupled with a sharp fall in imports (again lockdown related) produced a big increase in
trade which offset the weakness in the domestic side of the economy. Overall, we should expect to see a
dramatic improvement in the domestic side of the economy through the remainder of the year as society
reopens and consumer spending and investment kicks back into life.
Equity market trading was generally positive during last week’s holiday shortened week. European equities performed relatively well as stronger oil prices and confidence in the economic outlook helped a market which typically tends to contain more economically sensitive sectors. US market sentiment improved late in the week thanks to the May employment report (noted earlier) which had something of a ‘Goldilocks’ feel to it i.e. economic growth is not too hot (to push the US Fed more towards tightening monetary policy) and not too cold (leading to concerns the economy was slowing down). The G7 meeting of finance ministers began in the UK late last week also and in the short-term equity investors reacted favourably to early reports that the G7’s global tax minimum threshold would be lower than first expected . This week’s ECB Governing Council meeting on interest rates will also be a focus for equity investors.
Sovereign yields were little changed through the last week. In the Euro zone May inflation hit a two year high of 2% (up from 1.6% in April) with the core inflation rate also rising to 0.9%. Yet government bond investors in the region largely shrugged their shoulders, again further evidence that so far, they still believe the pickup in inflation to be temporary. Corporate bond investors also gave something of an indifferent reaction to the news that the US Federal Reserve was likely to wind down the Secondary Market Corporate Credit Facility (SMCCF), a program to purchase corporate bonds that was enacted to help corporate borrowers during the height of last year’s pandemic. Although SMCCF purchases have only totalled $12Bn, the lack of a reaction was a slight surprise considering it could be the Fed’s way of testing the investor waters on any further rollback of its bond purchases.
The commodity sector moved higher again last week with oil once more spearheading the gains. Oil hit three month highs as investors welcomed the decision by the OPEC nations and Russia to limit oil supply increases to 2 million barrels per day over the next few months, an increase that was seen as relatively modest and unlikely to upset the demand-supply picture, particularly with Iranian supply possibly also coming onstream later on this year. The flow of strong PMI reports around the world also kept the positive momentum for commodities ongoing while the latest data from the UN Food and Agriculture Organisation showed that commodities’ gains in 2021 haven’t just been limited to oil and metals. Its May update showed that global food prices rose 40% over the past year, further adding to inflation pressures around the world.
Hospitality – Sharp rise in hospitality spend as Ireland emerges from lockdown
The Irish domestic tourism sector is in for a dramatic rebound this summer judging by the latest monthly spending analytics revealed by Revolut. As restrictions began to ease and hotels began accepting bookings in May, a whopping 91% month on month rise in hotel spend was recorded. A similar trend was observed in bar expenditure, as May’s spending was 57% higher than the previous month. These initial results tend to support our view that domestic tourism will thrive this summer as the economy reopens and coronavirus restrictions are gradually eased.
Commercial Real Estate – Matheson office purchase; a sign of investor confidence in Dublin market
Deka Immobilien Investment has followed up last year’s purchase of Baggot Plaza by acquiring Matheson’s offices in Sir John Rogerson’s Quay. Bought from Irish Life Investment Managers, the Irish Times reported that the price paid was €164 million for the 133,000 square foot property. In April 2020, at the height of the Covid-19 pandemic, instead of exercising a break option Matheson signed a new 12 year lease on the property at a rent of €55 per square foot. Deka’s purchase demonstrates huge confidence in the outlook for commercial property in Dublin.
Last week Savills also published a Q1 update on the Irish investment market highlighting that Ireland continued to attract large volumes of capital into its real estate market. In total, €1.2bn transacted in Q1 which was double the volume for the same period last year and the strongest Q1 in the past ten years. The Private Rented Sector (PRS) market accounted for the largest share of investment spend by sector, comprising 58% of transactions while the office market accounted for 32%. This significant transaction activity illustrates that the real estate investment market is very much alive despite the COVID restrictions in place.