Thursday 23 January 2020

After a year spent at the Brexit cliff-edge, what can Ireland expect from 2020?

Brexit and global trade wars are among the challenges to come

Crunch talks: EU Brexit negotiator Michel Barnier, left, with Tánaiste Simon Coveney. Photo: REUTERS
Crunch talks: EU Brexit negotiator Michel Barnier, left, with Tánaiste Simon Coveney. Photo: REUTERS

David Chance

What a difference three months and a third interest rate cut this year from the US Federal Reserve have made to the outlook for the world and for this island.

Up until mid-October, financial markets were flashing red and signalling that another recession was in the offing, as the prospects for growth in the United States, the world's largest economy and our largest export market, started to dim.

Added into that was the spectre of a 'hard' Brexit, although the coming year will also be full of trade drama from London, as the UK is certainly 'at it again', in an attempt to force negotiations and please the Conservative Party's leaver base.

The gloomy outlook for the world prompted economic forecasters here to warn of a sharp slowdown in growth from the nearly 6pc now expected for 2019.

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The one bright spot next year was expected to be the domestic economy, thanks to Government investment, an increase in construction and rising wages that were bolstering domestic demand.

The Department of Finance was especially bearish, with a forecast of 3.1pc growth for the year, as it warned that the world economic expansion had "slowed almost to a standstill in several regions and has even gone into reverse in some", adding that "this softness in the global economy may not be short-lived".

Key players: UK Prime Minister Boris Johnson and US President Donald Trump could shape the global economy in 2020. Photo: REUTERS
Key players: UK Prime Minister Boris Johnson and US President Donald Trump could shape the global economy in 2020. Photo: REUTERS

The Economic and Social Research Institute warned that 2020 would bring a sharp slowdown in exports growth, to 6.3pc from 9.6pc in 2019, "amid downward pressure on US growth", and that "growth in Europe continues to wane in the midst of a deteriorating external environment".

Now, the phrase on everyone's lips is 'reflation trade' and stock markets have taken off again.

Ten-year treasury yields have now pushed up to 1.92pc, while even in Germany, negative rates have become a little less negative, with the 10-year Bund yielding minus 0.25pc, compared with a low of 0.74pc in September.

The condition of the world economy is far more important for a small trading nation like ours, where exports are equivalent to 122pc of economic output, than it is to the likes of Germany and France, which have large domestic populations.

For Germany, the trading powerhouse of Europe, exports are less than half as important to its economy as they are to that of the State.

So when prospects for the US, which takes almost 30pc of our exports to the tune of €40bn, turn up - and there are even signs the eurozone may be over the worst and growth here looks set to exceed forecasts, as it has done in every year since 2016 - the outlook brightens considerably.

According to research from the National Treasury Management Agency, a 1pc fall in US output results in a 1.01pc decrease in output here.

In other words, when the US economy shrinks, ours shrinks by a slightly larger amount and, by the same token, when America expands, the economy here grows as well, by a bit more.

If Jan Hatzius, who is chief economist at Goldman Sachs, is correct and the prognostications of global doom and gloom among forecasters here are overdone, we could be in for another bumper year of growth in Ireland.

"We expect 2020 US growth to rise to 2.5pc off a recovery in housing, strength in consumer spending, and a fading inventory drag; our estimated odds of a US recession within the next 12 months have fallen to 20pc," Mr Hatzius said.

Goldman also expects eurozone growth to pick up to 1.1pc next year, another gain for exporters here.

With the US having for the first time ever entered a decade and left a decade with no recession - even though it has been 10 years of slow, and at times painfully tentative recovery - Ireland too has enjoyed a long upswing.

It has been one with substantially more growth than the United States, even if a third of the rise has been down to tax accounting rather than the real economy. According to the Nevin Economic Research Institute, a trade union-affiliated think-tank, after years of crisis-induced stagnation between 2008 and 2015, average weekly private sector wages have picked up sharply, growing at 3pc since the third quarter of 2015.

By the third quarter of 2019, they were up 3.9pc over the previous year, while average hourly wages have also picked up since the recession, with a rise of 10.5pc in the past four years - including 4.7pc in the 12 months to the third quarter of this year.

"The short-run outlook for wage growth is favourable and reflects the increasing tightness of the labour market," according to Dr Tom McDonnell, who heads Nevin's analysis of the Republic of Ireland economy.

He warns, however, that the longer-term picture is not so rosy, as the share of national output that goes to workers here has been falling, as it has been in most rich-nation economies, driving inequality higher. "To reverse this trend of declining labour share and rising market inequality, it will be necessary for labour compensation per hour to exceed the medium-term average sum of inflation and labour productivity. This suggests a medium-term wage target of 3.5pc or higher," he wrote in a report.

However, for now, the positives appear to outweigh the negatives.

There even appears to be a truce, of a kind, as the US and China have stepped back from another major escalation of their trade conflict.

Even if the prospect of peace breaking out in the fight between the two biggest economies in the world is a distant prospect, the rhetoric will at least tone down, according to Timme Spakman, an economist with investment bank ING, who covers international trade.

Mr Spakman notes that the stand-still agreement with China could allow US President Donald Trump to present himself "as a deal-maker as the 2020 presidential elections approach".

Another deal-maker is also going to have an outsized impact on the economy here as Brexit unfolds.

While the UK has fallen in importance as an export market, it still accounted for 11pc of exports in 2018.

As a result, the terms that Prime Minister Boris Johnson negotiates for a future trade relationship with the European Union will matter a great deal to farmers, the food industry, and to small and medium-sized engineering firms that are most exposed.

Legislation passed by parliament now means that the stated aim of the UK is to strike a trade deal by the end of next year, or to leave the bloc on World Trade Organisation terms after December 2020.

Mr Johnson has said he will strike a deal by the end of 2020.

But this is something that Federico Fabbrini, director of Dublin City University's Brexit Institute, described as an "impossible task to be accomplished in just 300-plus days".

And while the option for an extension until December 2022 exists, there is still the risk of a damaging hard Brexit by the end of next year.

Many observers had believed that a big majority in parliament would give Mr Johnson more room for manoeuvre than his predecessor, Theresa May, whose withdrawal deal was repeatedly torpedoed by Brexit hard-liners.

Mr Johnson wants the UK to set its own labour, environmental and company rules.

"There's just one problem," according to Jonathan Portes, professor of economics and public policy at King's College, London.

"There's no chance of the EU agreeing to such a deal. No level playing field - not to mention concessions in other politically sensitive areas, such as fisheries - means no trade deal," he wrote in an analysis of the UK government's plans.

As the cliff-edge approaches, Professor Portes expects both the UK and EU to pull back from the economically damaging precipice.

"So, I'm willing to make a bet… that come January 2021, one way or another, the UK will - more than four years after the referendum - still be in the single market," he said.

Tánaiste Simon Coveney appeared to have nailed it when he termed the UK's decision to enact legislation to avoid an extension as "strange".

"Obviously, that's a decision for the British government to make but the EU will find it strange that the UK is essentially closing off options that it itself could use later on in the process," Mr Coveney said.

A no-deal Brexit in trade terms could punch a huge hole in UK government finances and push borrowing to £92bn (€108bn), or 4pc of national income, by 2021-22, according to the Institute for Fiscal Studies.

This would sink any plans for investment in the newly Conservative northern regions of England.

The prospect of winning the north again and securing another term in office is likely to appeal to Mr Johnson, according to Jacob Funk Kirkegaard, a senior analyst with the Peterson Institute for International Economics, a top Washington think tank.

"To date, the EU27 has got most of what it wanted from the Brexit negotiations," Mr Kirkegaard noted.

Irish Independent

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