Monday 23 September 2019

It may be silly season, but it's time to get serious on economy

UK prime minister Boris Johnson has stoked business fears of a no-deal Brexit. Photo: Getty Images
UK prime minister Boris Johnson has stoked business fears of a no-deal Brexit. Photo: Getty Images

Loretta O'Sullivan

The Dáil has shut up shop and the builders have gone on holidays. Music festivals are in full swing and BBQs are being fired up for the bank holiday weekend. It's officially the silly season, that time in late summer when major news stories dry up and conversations turn from weighty topics to more frivolous ones; the time when we go from putting the world to rights to indulging the trivial - Love Island anyone?

Well, that's the idea anyway. This year might not quite work out like this, thanks in no small part to political developments across the water. Over three years on from the UK's referendum on EU membership and uncertainty about the leaving process and the future trading relationship is still clouding the horizon. The original Brexit deadline of March 29 has come and gone, and Article 50 has been extended to October 31. But exactly what happens next is up in the air.

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Attempts to break the impasse in Westminster ended in failure, and Theresa May has exited stage left, with her resignation as prime minister kickstarting the Tory leadership contest that resulted in Boris Johnson entering stage right.

Her departure and his arrival have raised fears of a no-deal Brexit come Halloween, spooking households and firms alike on this side of the Irish Sea.

Brexit-related uncertainty has been weighing on consumer and business confidence here for some time, of course. But the July reading of the Bank of Ireland Economic Pulse was the lowest since the sentiment tracker began back in January 2016.

With things looking like they may be reaching a zenith, households were especially nervous about the economy and what all of this might do to it.

A number of firms impacted by the UK's leave vote have already pressed the pause button on their investment plans for this year. And with the slumping pound - it's currently trading around the 91p mark against the euro - starting to bite in terms of competitiveness, the business mood took a turn for the worse too.

None of this comes as much of a surprise. Previous periods of intense Brexit discussion and debate have also seen large drops in sentiment.

And to be sure, it is not just the UK backdrop that is unsettled. Tensions on the global trade front are high as well.

There are challenges at home too, as available resources are rapidly being used up. The unemployment rate is down to 4.6pc, meaning we are now effectively at 'full employment', and at the stage of the cycle when wage and price pressures typically begin to build.

This has given rise to increased talk of overheating risks, though so far, the pressures on both have been kept in reasonable check, at the aggregate level at least.

Activity has also been holding its own. In fact, GDP growth proved stronger last year than the Central Statistics Office initially thought, and surprised to the upside in the opening quarter of this year too.

Reflecting this, the latest Bank of Ireland forecasts have growth of 4.8pc pencilled in for 2019 as a whole (revised up from 4.5pc), and 3.8pc for 2020 (previously 3.6pc).

With foreign direct investment and relatively acyclical, multinational-dominated sectors like ICT and pharma-chemicals going strong, exports are expected to do well over the coming years. The domestic economy is also set to expand as construction activity and consumer spending continue at a decent clip; albeit sentiment could well be ropey given the uncertain external environment, tempering business investment in particular.

Needless to say, however, if a no-deal Brexit were to materialise come Halloween, the outlook would be a lot less benign. Substantially lower GDP growth would be in store and difficult policy choices would have to be made. This is why households and firms are on edge, and who can blame them?

Yes, the economy is faring well, but these are testing times and how Brexit plays out will be telling for how it evolves in the near term and further out. So even though it is the silly season, now is not the time for indulging the frivolous. Now is the time to try to put the world to rights.

Economists can only set out the likely path for the economy - to the best of their models' abilities - under certain assumptions and within a range.

It is the politicians on all sides who are in the driving seat when it comes to turning assumptions into the reality that we will all have to live with.

Sunday Indo Business

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