Sunday 23 October 2016

Richard Curran: The 10 things that could go wrong with Ireland's economic recovery

This recovery is great ... so what can possibly go wrong?

Published 09/01/2016 | 02:30

Public Expenditure Minister Brendan Howlin TD and Finance Minister Michael Noonan are all smiles breaking good news on the End Year 2015 Exchequer Statement – but there are many external threats to our upturn in fortunes. Photo: Gareth Chaney/Collins
Public Expenditure Minister Brendan Howlin TD and Finance Minister Michael Noonan are all smiles breaking good news on the End Year 2015 Exchequer Statement – but there are many external threats to our upturn in fortunes. Photo: Gareth Chaney/Collins

The year is barely nine days old and already there appears to be a wide gulf between the story of Ireland's continued economic recovery and the upheaval and turmoil brewing beyond these shores. Michael Noonan and Brendan Howlin presented another set of stellar exchequer figures this week, which showed the State took in €3bn more in taxes than expected in 2015.

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Meanwhile, over in Shanghai a selling surge prompted the suspension of trading on the stock exchange. Serious economic and geopolitical risks surround us, from the Middle East and Isil to Brexit, Vladimir Putin and even Donald Trump.

As we know from the September 11 attacks in New York, a political event can have huge economic ramifications. And as everyone learned from the financial crisis to the bank guarantee, an economic problem can too easily become a political one.

There are so many uncertainties which could conspire in the wrong way to seriously derail our recovery. Many of them are completely external and outside the control or even influence of any Irish government. Thankfully, most of them won't happen. But it only takes a few. At the very least they should provide a warning for Irish politicians not to be complacent in economic management and for Irish consumers, workers and investors, not to presume the only way from here, is up.

Here are ten risks in no particular order

1. Brexit

The British public will vote, most likely later this year, on exiting the EU. Opinion polls put the outcome at too close to call, with around 52pc likely to vote to stay in. Just 8pc of British economists believe a Brexit would be good for the UK economy. An exit of our biggest trading partner would lead to sizeable economic losses for Ireland, along with the return of border controls with the UK.

2. Interest rates

Ireland's recovery has taken off against a backdrop of low interest rates. With the eurozone in the doldrums, there is a view that rates will remain low. But they can't stay low forever and people need to bear that in mind when making long-term financial decisions.

This includes the Government when it signs up to current expenditure increases while borrowing temporarily cheap money on the bond markets. Consumers borrowing to buy a car, or take a holiday, should be aware of the interest-rate cycle. So too should businesses that borrow heavily cheap three-year money on the markets today.

3. Stock market bubbles

Several stock market bubbles could suddenly burst in the short to medium term. There is a growing consensus around a US technology bubble, which if it burst could affect multinational investment in the tech sector here.

There is also a fear that stock market gains in the US and UK have been artificially boosted by access to cheap debt to the corporate sector, care of quantitative easing programmes in the US ($4,500bn), the UK (stg£375bn) and the eurozone (€60bn per month). The US and UK programmes have ended and a price may yet have to be paid for creating all that new money.

4. China

The world's second-largest economy is slowing down at an unknown rate. Critics question official economic figures. Manufacturing in China contracted for each of the last five months in 2015.

The Chinese currency is falling, while stock markets have tumbled and relied on state support through massive share buying. The Chinese government has spent $800bn in the currency markets and has already bought up 6pc of the Chinese stock market to try to stem the investor exit.

A hard landing in China would be an economic shock that would hit global multinationals and global economic growth, with a wave of consequences from currency values to trade.

5. The Trump wild card

There is real uncertainty about the outcome of the US Presidential election. Donald Trump's showing in opinion polls has confounded experts. It raises the possibility of a highly unpredictable billionaire sitting in the Oval Office. President Trump would close the US to large-scale migration, could adopt a non-interventionist stance in the turbulent Middle East, and would be expected to force American companies to repatriate jobs and investment back to the US. That could be bad news for us.

6. The Middle East

Isil has dominated the headlines epitomising the uncertainty in Syria and Iraq. As a terror threat, it can lead to greater political instability in Europe and the US as governments try to grapple with security and migration issues.

It is the world's most powerful terrorist organisation and has followers from Nigeria to the Philippines and from Bradford to Brussels. There are now at least six failed states across the Middle East and Africa including Afghanistan, Iraq, Libya, Mali, Syria and Yemen. Wider Western responses in Washington, Brussels, London, Moscow and Paris are fractured and incoherent.

7. The dark horses

If Isil is an obvious source of geopolitical instability, Saudi Arabia and Iran have been less noticed. Tensions among the ruling Saudi elite and a resurgent Iran could kick off greater military action in the Middle East. Both countries are ramping up their military firepower and seeking greater influence in the region while sitting on opposite sides of the Sunni/Shia divide.

The map of parts of the Middle East may be re-drawn in the next few years, starting in 2016.

8. Oil

Oil is at its lowest level since 2004, at around $34 per barrel. Triggered by over-supply, as long as Saudi Arabia continues to produce at current levels, it should remain low. However, increased Middle Eastern conflict or a change of policy in Saudi Arabia could spark price rises.

Cheap oil has been a huge boost to economies like Ireland's, but we may get too used to it. It has kept inflation down in an economy that is growing at nearly 7pc per year. Any sudden spike would increase costs, and deliver a sharp return to oil price reality.

9. Emerging economy troubles

Emerging economies were seen as a major source of global economic growth. The commodity price collapse and currency swings have left many of them vulnerable. Don't be surprised if one of the world's major emerging economies, like Brazil for example, ended up in an IMF bailout in 2016.

The wider knock-on consequences could be serious, with a drop in economic activity.

10. Nobody has a plan

Europe is divided by the migration issue and whether its future is as an open Europe or a closed one. Chancellor Angela Merkel's policy of allowing up to one million migrants into Germany is causing significant domestic political pressure for her. Some believe she could even be forced to step down as chancellor by the end of 2016.

The EU lacks a coherent economic strategy on its place in the world and many of its economic problems remain unresolved. The loss of Merkel would add to the uncertainty.

Irish Independent

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