Monday 26 September 2016

Come crash or conflict, we're pretty well padded against the worst of it

Published 14/01/2016 | 02:30

Despite collapsing oil prices, market crashes and the threat of terrorism, our economy should remain slump-free. A woman walks past an ad featuring the currency symbol for the Chinese yuan in Hong Kong, as shares fall in China. Photo: Xaume Olleros/Bloomberg
Despite collapsing oil prices, market crashes and the threat of terrorism, our economy should remain slump-free. A woman walks past an ad featuring the currency symbol for the Chinese yuan in Hong Kong, as shares fall in China. Photo: Xaume Olleros/Bloomberg

The sky is about to fall on our heads. That, according to the growing ranks of gloomsters in the economic forecasting business, is our imminent fate.

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As most indicators in the first two weeks of 2016 continue to point to good times ahead for the Irish economy, concerns have been growing since the start of the year that the world economy is heading in the opposite direction, and heading there fast.

Turmoil in many financial markets across the globe is one reason why fears are growing for the real economy of the world.

Another is the "geopolitical risk" that analysts like so much to talk about.

One of the most talked about geopolitical dangers in 2016 is a conflict between long-standing rivals Saudi Arabia and Iran. The prospect of two of the Middle East's most powerful and oil-rich states going to war has risen following the former's execution of a prominent Shia cleric nearly two weeks ago.

Another is the growing threat of the so-called Islamic State. Hardly a week passes without the group committing an act of barbarism. On Tuesday, a suicide bomber killed 10 people in Istanbul, an act that the Turkish authorities immediately attributed to that organisation.

There is no question that there are lots of risks and threats out there at the moment, but there are almost as many reasons to believe that the danger they pose to the economy is becoming exaggerated.

Start with the terror threat.

The attacks on the US on September 11, 2001 were enormous in their scale and the loss of life they caused. It is believed by many, and still often stated, that those atrocities had a global economic impact. That is utterly wrong. They didn't even have a discernible economic effect in the US. In fact, the shallow recession into which the US had slid in 2000 hit bottom in the third quarter of 2001, exactly the time the attacks happened.

Nor have acts of hyper-terrorism in Europe dented economic performance. The train bombing in Madrid in 2004 which killed almost 200 people had no effect on the Spanish economy. Ditto the Tube bombings in London the following year in which dozens died.

From the evidence to date, the same can be said of the attacks in Paris last November and the lock-down of Brussels in the aftermath of the mass murders. In neither France nor Belgium did consumer confidence decline in December compared with November. Business confidence actually improved in both countries.

None of this is to diminish the human suffering caused by terrorist attacks or to suggest that terrorism is not a real and serious threat about which we should be concerned for security reasons, but there is no factual or evidential basis to suggest it has effected developed economies in any meaningful way.

If terrorist groups have very limited scope to disrupt the functioning of western economies, conflicts between states are a different matter. The growing tensions between two of the biggest oil exporters in the world would normally have an immediate impact on the entire world via higher energy prices.

But oil prices have collapsed over the past 18 months. A barrel now trades at around $30, down from more than $100 in mid-2014. Even if a full-scale conflict broke out in the Persian Gulf and supplies were restricted from the two countries, the current price would have to rise three-fold before it returned to the levels of 2014. That insulates the world economy from the effects of any conflict.

The other much talked about concern is what is happening in financial markets. The markets for companies' shares have been hard hit almost everywhere since the turn of the year. The big falls in the stock exchange in the world's second largest economy, China, have caused particular concern.

What happens in financial markets has a much bigger impact on economic well-being than terrorism and most geopolitical events - think of the depression that followed the crash of 1929 and the disaster that followed the collapse of Lehman Brothers in 2008. But panic among financiers does not always mean that everyone else has something to worry about.

The classic case was Black Monday in October 1987 when stock markets around the world suffered some of the biggest falls ever recorded, yet there was no discernible impact on everyday economic activity. Even the British economy, which is more dependent on its financial sector than any other big economy, didn't suffer. Indeed, economic growth continued and the jobless rate kept falling at the same rate it had done in the previous 12 months.

In the case of China today, there is a decent case to be made that what happens on the stock markets won't affect an economy of 1.3 billion people a great deal, owing to the small size of the former relative to the latter. While there is a risk of a crash as a result of companies and households hugely ramping up their borrowing in recent years, a collapsing stock market may not be the trigger for a wider bust.

And even if the worst happens in China, there is good reason to think that it won't drag economies in this part of the world down with it - only around 1pc of Europe's GDP is accounted for by exports to China (the figure is less than 2pc for Ireland).

The claim made by one investment bank earlier in the week that the world is looking down the barrel of another 2008-2009 Great Recession seems too pessimistic. There are many risks, and we in Ireland are very far from being out of our own woods, but there is momentum in the economy here, in Europe and in the US.

The nature of the business cycle means that recessions are never very far away, but the balance of risks still points to 2016 being slump-free, at least in our corner of the world.

Irish Independent

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