Thursday 8 December 2016

Wobbly sterling spells trouble ahead for Ireland

Sterling fell sharply last week. Prospects for the UK currency are uncertain, leaving Ireland vulnerable to a sudden shock

Published 06/09/2015 | 02:30

The last time sterling fell out of bed in late 2008, it lost 20pc of its value against the euro in the space of just 10 weeks - a development that sent southern shoppers streaming north
The last time sterling fell out of bed in late 2008, it lost 20pc of its value against the euro in the space of just 10 weeks - a development that sent southern shoppers streaming north

It was another volatile week on the foreign exchange markets with sterling falling to just over €1.35, its lowest level for almost four months, on Tuesday. While sterling recovered slightly later in the week, the outlook for the UK currency remains uncertain.

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The seemingly never-ending Greek crisis has meant that most attention has been focused on the euro, with the single currency losing 8pc of its value against the dollar and 12pc against sterling since the beginning of 2015.

A weaker euro has been almost entirely good news for this country. The tourist industry is on track for its best year ever, with visitor numbers up 14pc for the first three months of the year.

A survey by the website hotels.com showed that hotel room prices have jumped by 15pc in the first half of 2015, with the average room rate now standing at €116 per night. The price rise has been even steeper in Dublin, with average room rates leaping by 19pc to €128 per night.

The motor trade has also been a major beneficiary of the weak euro, with new car sales up 31pc during the first seven months of 2015. Non-motor retail sales are also growing strongly, recording a 3.3pc value increase in the first seven months of the year, while the latest consumer confidence figures from KBC/ESRI show consumer sentiment is now at its highest level since 2006.

The weak euro has also provided agriculture, which has been battered by this year's collapse in milk prices, with a silver lining. While dairy farmers have been clobbered, beef farmers have benefited from higher prices in their biggest market, the UK.

This is all feeding through into a stronger domestic economy, with the ESRI now forecasting GNP growth of 4pc this year and 3.5pc next year. Stronger growth in the domestic economy is translating into higher tax revenues, with the August exchequer returns showing tax revenues for the first eight months of 2015 running €2.5bn, or 10pc, ahead of those for the same period of last year.

So far so good, but is this as good as it gets? While the strength of the dollar has been largely driven by its 'safe haven' status as nervous investors seek security in an uncertain world, sterling's strength is harder to explain. While the British economy has recovered strongly since the 2008 financial crisis, the UK's current account deficit - the difference between the value of goods and services which it buys from and sells to the rest of world - is, at 6pc of GDP, the highest since records began.

In March, the Bank of England's Financial Policy Committee - which is responsible for identifying possible threats to UK financial stability - put the current account deficit at the top of its list of 'domestic risks'. While Bank of England governor Mark Carney has argued that the record UK current account deficit is "not an immediate cause for alarm", others aren't so sure.

It's not just the size of the UK current account deficit relative to GDP but the speed at which it is growing, from 3.5pc in 2012, to 4.7pc in 2013, 5.9pc in 2014 and well over 6pc this year. All of the ingredients of a good old-fashioned sterling crisis, where the value of the UK currency falls very quickly, are now in place.

The last time sterling fell out of bed in late 2008, it lost 20pc of its value against the euro in the space of just 10 weeks - a development that sent southern shoppers streaming north, with queues stretching all the way from Newry to the Border and forced the Irish Government to cut VAT and excise duty in a vain effort to slow the exodus.

What are the chances of a similar sterling collapse any time soon and, if it happens, what will the consequences for this country be?

When he was campaigning for re-election in last May's UK general election Prime Minister David Cameron promised voters a referendum on Britain's EU membership by 2017. While this may have seemed like a relatively harmless concession to his Eurosceptic bankbenchers at the time, that's not how it looks now.

Last week's harrowing TV pictures of thousands of refugees fleeing persecution in the Middle East will have played directly to the narrative of Nigel Farage's anti-EU, anti-immigration UK Independence Party. The fact that the people we saw on our screens this week were mostly refugees, rather than immigrants, is a distinction that will very quickly become hopelessly blurred in the rough and tumble of a referendum campaign.

By greatly increasing the chances of a British exit from the EU, so-called 'Brexit', will the rapidly worsening refugee crisis provide the trigger for a new sterling crisis? If it does, we in Ireland will feel the pain very quickly.

Much, if not most, of the recovery in the Irish domestic economy over the past few years has been driven, not by Troika-imposed austerity, but by favourable exchange rate movements as the value of the euro fell against both sterling and the dollar.

Tourism has been one of the big winners from a weaker euro. There were just over six million overseas visitors to Ireland in 2010. This had climbed to 7.6 million by 2014. If the 14pc increase in visitor numbers recorded in the first quarter of this year is sustained, then visitor numbers could hit 8.5 million in 2015. Both in terms of visitor numbers and the amount spent, Irish tourism is very much dependent on the British and American markets. In 2014, 56pc of the visitors and over half the €3.5bn spent by foreign tourists in Ireland came from the UK and North America.

The motor trade, a massive tax generator for the exchequer, both through VRT and VAT, has also lucked out on the exchange rate. Though one mightn't realise it from the sometimes hysterical coverage in the motoring press, the number of cars registered for the first time in Ireland since 2009 has, in fact, been remarkably stable at about 150,000 a year. What has changed has been the composition of those cars.

In 2009, just 73,000, less than half, of the 149,000 cars registered for the first time were new. Fast forward to 2014 and 92,000, or 63pc, of the 145,000 cars registered for the first time were new cars. This trend has continued into 2015, with almost 100,000, 78pc, of the 128,600 cars registered for the first time being new. Quite clearly, the strength of sterling means that it now makes far less financial sense to import a used car from the UK, with motorists increasingly opting to buy new in this country instead.

Stronger sterling has also come to the rescue of beef farmers. Last year's beef factory protests are now a distant memory as a weaker exchange rate makes our beef more competitive in the key UK market. No less than 53pc of Irish beef exports went to the UK in the first half of 2015. Sheep farmers have done well too, as dearer sterling has meant that their main competitors, UK sheep farmers, are finding it much more difficult to sell into the key French market, points out IFA economist Kevin Kilcline.

But can our current run of good luck last? Failte Ireland spokesperson Alex Connolly believes that, instead of obsessing about the exchange rate, the Irish tourist industry needs to focus on the things that it can control, such as delivering good value to overseas visitors and providing them with compelling reasons tocome here. He cites the examples of the Wild Atlantic way and its east coast counterpart, Ireland's Ancient East, as examples of the new breed of visitor attractions that have been developed to lure overseas visitors to Ireland.

Tom Cullen, director of the Society of the Irish Motor Industry, is also sanguine. He believes that total new car sales will exceed 120,000 this year, close to the 140,000 needed to renew the motor fleet. This means that there will be a sufficient supply of domestically sourced new cars in the years ahead, regardless of the exchange rate.

Tom Burke, director of IBEC's Retail Ireland offshoot, points out that a weaker euro is a mixed blessing for many retailers. In many sectors, such as books, retailers are finding it extremely difficult to recover the extra cost from shoppers. This is borne out by the CSO's retail sales figures, which show that while the value of non-motor retail sales rose by 3.3pc in July, the volume of sales rose by 6.6pc - ie retailers are having to cut prices to keep shoppers coming through their doors.

However, with the latest Eurostat figures showing that the price gap between Ireland and the rest of the EU is widening once again - Irish prices rose from 117pc to 121pc of the EU average between 2012 and 2014 - we are leaving ourselves extremely vulnerable if, or more likely when, the value of sterling falls sharply.

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