Monday 27 January 2020

Spread of Marmite war just the start for Irish exporters caught in post-Brexit fallout


WHO would have thought the biggest thing in European economic history since the Marshall Plan would start with Marmite? And, if you'll pardon the pun, spread to Ireland?

But then, of all the many close connections between Britain and Ireland, the closest and least recognised, is grub. Raw and processed, exported and imported, bought and sold; we dine together.

The other surprise was the speed at which all this happened. Currency markets have not waited for clarity on Brexit and companies have not waited to adjust to sterling's fall. Unilever may have acted particularly dramatically, and Tesco reacted with equal vigour, but the trends seem to have shown up in the inflation numbers since September.

We should not really be surprised. There is truth in the cliché that business moves faster than it used to. There is also the evidence of recent history.

Before the crash, inflation in both countries was in the 4-5pc range. Ireland suffered a ferocious deflation after the crash, with prices falling at 6pc per annum at the trough. British prices merely stabilised.

These are consumer prices and I was amazed at the time that there could be so big a gap between two such closely linked consumer economies. It was partly the different scale of recession in each country and partly different policies from the ECB and the Bank of England.

The latter's stimulus package depressed sterling and inflation surged to 5pc. With money wages stagnant or falling, real wages fell rapidly. This became their big political issue of the recession and the Bank reversed engines.

In Ireland, inflation peaked at 2pc. When real wages were compared, the difference for workers in each country was smaller than might be supposed, although Irish workers were hit by bigger tax rises and service cuts.

The lesson is that the impact on the two economies when currencies diverge may not be straightforward. Nor has it happened often enough to provide credible forecasts as to what the impact will be in the future.

The UK authorities also noticed that the effect on exports and imports from a weaker pound was not as strong as might have been expected in the past. Today's complicated supply chains and sophisticated products have made simple price changes less important - although they may still be more important than most for foodstuffs and everyday products - both important for Ireland.

Before we have a chance to find out, something more dramatic may happen - a full-blown sterling crisis. One of the oddest things in the UK debate has been the unchallenged assertion that the British economy's "fundamentals" are sound. They are anything but.

Fundamentals got a bad name in this country in the wake of the crash. But at least it took a bit of gumption to see that the budget surpluses were not fundamentally sound but based on transient property revenues. There is no need to go looking behind the headlines in Britain.

Probably the most fundamental figure is a country's position in its dealings with the rest of the world; known as the current account balance.

Here the statistics are startling. Almost every eurozone country has a surplus on its payments. Even Greece's once yawning deficit is down to one per cent of GDP. This could be taken as evidence that the euro area has endured too much austerity, but that can hardly be a defence for Britain's deficit of almost 6pc.

That is equivalent to having to borrow half a per cent of GDP in foreign currency every month, in order to cover the deficit.

At one time, such a state of affairs would have made a run on sterling inevitable but financial markets are not what they used to be and seem more more willing to finance deficits than they used to be.

Besides, in a world of negligible interest rates, half a per cent more from the Bank of England might be enough to buy the necessary support. Not good for the economy, but not as bad as a sterling crisis.

Such a crisis would take us into uncharted territory. Unlike 1991, Ireland has no currency for markets to sell but there would be panic nevertheless. It would probably manifest itself in the cost of government borrowing, which is one good reason for eliminating such borrowing as quickly as possible.

If there is to be a run on the pound, logic suggests it will come sooner rather than later. That might be better for us too. There is an enormous amount of government loans to be repaid and replaced in 2020. Favourable conditions will be needed then.

In the end, what matters is where sterling settles. No one can foretell that, but it sometimes seems that a rough - very rough - guide is that should be near the point where Irish exporters begin to complain. That would suggest around 90p to the euro - which chimes with the equally rough guide of the Economist magazine's Big Mac Index, based on burger prices. That may be the best we can hope for.

Between high UK inflation and strong sterling, Irish exporters have had it fairly cosy for several years. One should never forget that this also applies to domestic firms which compete with British ones for sales in Ireland, as in the ferocious supermarket shelf battleground.

One has to think those cosy times have ended. As to what should be done, talk of "Brexit-proofing" the Budget must be one of the sillier slogans of recent times. Not only did it sound like something from the flyer of a dodgy roofer, it is likely to be of equally limited use. Budget measures will not keep this storm out.

This great trading island rarely mentions trade in its politics. Exports to the UK total around €18bn a year. Unlike trade with other countries, more than a third come from domestic Irish firms. The proportion is probably higher if one excludes the Dublin region, as the Department of Finance pointed out in a pre-Budget briefing.

Tax relief - the default position of every Irish lobby group - will not clear the losses from a permanent increase in the real exchange rate.

Government could take a leaf from the ISME small business lobby book and concentrate on reducing costs for local firms by keeping down public costs, but no sign of that so far.

Those extra costs are a burden business people will have to shoulder along with everyone else. They will have to do so while cutting their own costs, increasing productivity - which means shedding jobs - and developing new products for new markets. They should not be lulled by talk of soft exits and open borders.

Even if they come to pass, the prospects must be for a new value range for the British currency, and a battle for survival for Irish firms.

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