Wednesday 23 August 2017

Dan O'Brien: My nine economic wishes for a prosperous new year

National Front leader Marine Le Pen is a candidate in the upcoming French presidential election Photo: Reuters
National Front leader Marine Le Pen is a candidate in the upcoming French presidential election Photo: Reuters
Dan O'Brien

Dan O'Brien

The New Year has all the potential to be just as turbulent as 2016 was. It could very well be more turbulent. Let's hope it's not. Here's my economic wish list for 2017.

Ireland's economic recovery continues

As 2016 drew to a close there were mixed signals on the pace of recovery. In the second half of last year, some indicators, such as consumer spending, auto sales and tax revenues, suggested a slowdown in the rate of expansion.

As we begin the new year there is considerable uncertainty about the economy, even if that does not constitute real cause for concern yet.

It must be hoped that the softness in some indicators last year was a blip rather than a trend. There are a number of reasons to be optimistic. Business confidence remains high, as evidenced not least by the record quarterly level of investment in plant to machinery in the third quarter of 2016. In the short term, business conditions look set to remain good, with the exception of the sterling exchange rate and Brexit-related issues.

Consumer confidence softened somewhat throughout 2016. That said, it remains at a high level, and with considerable momentum in the labour market and the prospect of stronger wage growth, consumer confidence could well move back on to an upward path again in 2017.

Housebuilding accelerates sharply

The dysfunctionality of the residential construction sector seems to know no bounds.

After the construction frenzy in the five years up to 2008, when far too many homes were built in the wrong places, we now have a situation where too few homes are being built in the right places. The supply crunch is most evident in the rental sector.

Quite why so few homes are being built is somewhat perplexing. Rental yields in Dublin, where demand outstrips supply to the greatest extent, should have investors piling in to build new homes, but that is only happening to a limited degree as the housing completion figures have consistently shown.

Bust developers and still-broken banks with lots of bad debts are two parts of the problem. Another, supposedly, is that construction costs are too high. More research on that in 2017 should generate some definitive answers.

Whatever the reason for the failure of demand to match supply, let's hope 2017 brings a better-functioning market. Bringing housing output up to the required level would not only contain house price and rental inflation, it would add to employment and give the economy a further boost.

The public pay circle can be squared

The genie is out of the bottle. This was one of the cliches of 2016. When the Labour Court made it's remarkable finding on the eve of the Garda strike two months ago it blew apart the agreement between the Government and public sector unions.

Despite so-called restoration of bubble-era pay having begun more than two years ago, and further moves in that direction in budget 2017, there are now enormous political pressures for other public sector workers to get the same sort of generous awards granted to 13,000-odd members of the force - over and above those already allocated in the budget.

It is very difficult to see how industrial unrest can be avoided without significant additional resources being put towards the public pay bill. The most forlorn hope on this wish list must be that the public finances are protected and a sharp increase in strike action does not take place.

The European economy grows faster

The continental economy has been recovering over the past three years. But growth has been slow and uneven (the weakest link is discussed below).

Even though forecasting economic growth, as readers of this column will have heard before, can be done with no great accuracy, there appears to be enough momentum in the European economy to ensure that 2017 brings further modest growth. Barring a shock, such as a fresh banking crisis, it could even accelerate.

For all its weaknesses, Europe has a considerable number of economic strong points - from good human and physical capital to many highly globalised companies. It is not impossible that these strengths will become evident in 2017, leading to a virtuous cycle of increased confidence, investment, employment growth and consumption.

Italy doesn't go Greek

Of the bigger economies in Europe, Italy is the one that's in real trouble.

It has had almost had no growth for 20 years and has been the worst affected from the great recession and its aftermath. Despite never having a credit boom, its banks have a high and rising share of non-performing loans. This slow-motion banking crisis has been building for years.

Italy's fiscal crisis is even older. In the 1980s, Italy and Ireland became the first European countries to have public debt levels exceed 100pc of GDP. Over the decades Italy has made no substantial progress in bringing debt down from danger zone levels

With it at more than 130pc of GDP, Rome has very little leeway. If economic growth doesn't pick up it is hard to see how it can avoid following the tragic path of Greece.

Let's hope for a positive growth surprise in Italy in 2017.

The migration crisis calms

From a humanitarian perspective, every right-thinking person must hope that the wars raging across the Middle East can be calmed in 2017.

From a much more self-interested perspective, Europe very much needs them to stop. The arrival of large numbers of refugees on the continent in the past few years has bolstered support for reactionary elements who are only too happy to play on fears of inundation.

European history since World War II shows that support for such reactionaries dissipates quite quickly once migration levels fall.

For the sake of victims of violence in the Middle East and political stability in Europe, let's hope 2017 is more peaceful than in recent years.

Dutch, French and German elections see centre hold

General elections are scheduled to be held in Europe's two most influential nations in 2017, as well as in the Netherlands.

All will be important, but the French presidential election has the potential to deliver the coup de grace to the European Union.

The National Front wants to leave the EU and the euro. If its candidate, Marine Le Pen, makes it to the second round of voting in May, as polls suggest she will, she will be in a two-horse race.

All the polls also suggest a ceiling to her support of one-in-three voters. Even in the context of growing questions about the reliability of polling, getting from 33pc to 51pc would appear to be impossible.

As such, the election of Le Pen appears to be a very low-risk outcome at this juncture, but given its enormous impact if it were to happen, Europe and the world will watch developments in France like never before. A clear and emphatic victory for a centrist candidate would be a significant development and show that the reactionary tide in Europe is not going only one way.

Brexit means soft Brexit

March will bring some clarity, finally, on Brexit. The UK government is committed to formally starting divorce proceedings by the end of that month.

Despite six months having passed since the referendum there is little clarity on exactly what sort of Brexit Theresa May's government will seek. Decisions will have to be taken in the coming weeks.

If it has become clear to all those in government by March just how complex and costly a hard Brexit will be, there is still a chance that a softer version will be sought.

Most crucially, from an Irish perspective, that would mean Britain staying in both the single market and the customs union. There are many years to go before certainty is restored regarding the UK relations with the EU, but the next three months will reveal a great deal.

Trump-Lite!

Donald Trump will become the most powerful man in the world in three weeks.

He is an unrestrained egomaniac who stands against almost everything the United States has stood for for over 70 years. At the highest level, the implications for European and global security are enormous.

It is now all too easy to see the US under his leadership becoming embroiled in military conflict. It is even easier to see his concession of European democracies to a Russian sphere of influence.

He is against free trade and has vowed to bring American jobs home. Given the density of the transatlantic economic relationship and the number of contentious issues in that relationship, an American president who wants confrontation and who is not inclined to compromise poses huge risk to Ireland's economy.

The next four years will not be good, but the most that can be hoped for is that Trump focuses on domestic affairs and does not carry through on his protectionist agenda.

Happy new year.

Sunday Indo Business

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