Saturday 24 February 2018

Richard Curran: Don't worry: 2017 won't be that bad, despite uncertainty

Tourists walk past a souvenir stall on the south bank of the River Thames in view of the Houses of Parliament in London (Bloomberg)
Tourists walk past a souvenir stall on the south bank of the River Thames in view of the Houses of Parliament in London (Bloomberg)
Richard Curran

Richard Curran

Uncertainty is the order of the day as we begin 2017. There is uncertainty around Irish politics and whether this government will last another year; uncertainty around Brexit, around Trump, sterling, the dollar, the euro, Italian banks and further shifts to the right across Europe.

I think we can safely say that not all of these things will go against us - we couldn't be that unlucky!

However, when it comes to the world of business, uncertainty is probably the biggest single thing that company management hates the most. They can take adversity, change and downright bad luck, but not knowing about big picture issues, does give chief executives sleepless nights.

Amid all of this uncertainty there are also solid reasons to be optimistic about the year ahead on the economic and business front.

Tourism has just had another record year. New jobs are still being created as unemployment falls. Economic growth is expected to come in at around 3pc. The IDA project pipeline looks set to keep delivering foreign direct investment.

Despite the many solid indicators, there is a genuine sense that all of the big economic action will take place abroad.

Here in Ireland, the best we can do is react when it happens.

Most people making predictions a year ago would surely have egg on their face as they reflect on a most bizarre 2016.

However, undeterred by bitter experience, I will stick my neck out just a little on what lies ahead in 2017 and it won't be that bad.

1. The British government will soften its stance on a hard Brexit.

The next 12 months will not reveal anything like the final shape of British/EU relations after Brexit happens, but by next December we should have a clearer sense of where things are going.

Expect the British government to gradually step back from a full hard Brexit. Sterling is likely to fluctuate a lot in the Spring when British Prime Minister Theresa May triggers Article 50, but by the end of the year a softer Brexit will steady it somewhat.

Britain won't want to compromise on immigration control but will seek a transition arrangement, remain in the customs union and do sector-specific deals on access to the single market such as financial services.

Political upheaval isn't over in Britain. Expect fresh political turmoil from a move towards a softer Brexit.

2. The euro will muddle through.

Not really fit for purpose in so many ways, the single currency has a bizarre ability to muddle through crises. Incredibly, it seems to muddle through even when the cause of the crisis remains unfixed. Take the financial crisis or the Greek debt crisis, for example.

The same will apply to the Italian banking crisis. Italy will not reform its economy or political system in 2017 but will stumble towards patching up its difficulties, with the backing of the ECB, the EC, Germany and France, for the sake of eurozone.

Italy will bail out its banks. The bill will probably be higher than the figures already mooted, but new EU rules on bank bailouts will be bent to ensure bondholders don't lose out too much.

3. US president elect Donald Trump will have a very shaky start, promise everything and deliver very little in 2017.

Donald Trump's new administration will want to make a big impression of sweeping change from the very beginning of his presidency.

The early weeks will see an almost chaotic communications strategy with multiple mistakes, diplomatic faux pas, confusion and retractions as 'The Donald' loses the run of himself - even more.

They will make lots of big headline announcements about what they are planning to do, but won't actually introduce much of it.

The Trump presidency is being handed a growing economy with rising employment levels. He will try to claim as much credit for this as possible.

His rhetoric will be on foreign policy, crime, immigration, Islamic State, Putin, etc.

But his real focus will be on the US economy. He will announce a major reform of corporate taxes but don't expect much actual progress on this in 2017. He should make faster progress on a once-off low tax deal allowing US corporations to repatriate hundreds of billions held offshore. He will, however, focus on reducing regulation and red tape on banking, the oil industry and the environment.

He will pursue a strong dollar, a rising stock market and he will cut loose when it comes to exchequer borrowing.

The US deficit will balloon. The real impact of Trump will only be felt after he leaves.

4. The Irish Government will face more public sector industrial action.

There is a mismatch between the expectations of public sector trade unions and what the government can actually deliver.

It is difficult to say just how much of this tension will result in actual strikes.

Fine Gael will watch Micheal Martin and Fianna Fail very closely on this issue.

If the Government stands up to threats of industrial action, further strikes will leave the door open for Fianna Fail to pull the plug on the minority government.

Give away too much and the Government will be accused of wrecking what has been achieved with unaffordable pay increases.

Its search for a middle ground on this topic will dictate much of Government policy in 2017.

The big question is whether Martin will pull the plug on the Government in 2017.

On balance, I think there will be an election this year. The outcome may not be radically different to what we have now unless Fianna Fail is willing to do a deal with a Sinn Fein no longer led by Gerry Adams.

5. The tourism industry will have another big year but will struggle to make it a record one.

The tourism sector has delivered another record year in 2016 with a 10pc increase in foreign visitors to 8.8m.

Big challenges lie ahead, from hotel capacity in Dublin, hotel prices, a weak sterling which affects British visitors and American concerns about security in Europe.

More holidaymakers visit Ireland from Britain than from anywhere else.

Brexit uncertainty and a continuing weaker sterling will pose challenges for tourist numbers.

A fall-off in British visitors could be offset by rises in American visitor numbers, if they decide to travel.

The global security situation is unlikely to improve in 2017.

Ironically, more Americans travelled abroad in 2015 than any other year despite their security concerns. Out of a total of 73m international visits, 40m of those were to Mexico and Canada.

Trips to Europe were up 6pc at 12.5m.

Ireland might be seen as a safer European option than major cities like Paris, London or Berlin.

Airline capacity to Ireland will be at an all-time high too. Ireland has built real momentum in tourism in the last four years.

We should have another very good year but a new record will be hard to pull off.

6. Thousands more construction jobs will be created as house building finally starts to happen.

The construction industry is booming. The crane count in Dublin is very high which has been great for the sector.

Commercial property development has seen the creation of tens of thousands of new jobs in the sector. Finally, there are signs of real growth in residential building, albeit from a very low base.

According to the Construction Industry Federation, on-site construction commenced on 14,088 residential units in the year to November 2016, with 2,538 of those commencing in October alone.

Unfortunately, 2017 will not see the resolution of the housing crisis as a lot more houses are needed.

House prices will continue to rise in 2017 but not at very high rates.

7. Irish shares will have a better year.

The Irish stock market has had its worst year since 2010 with the index of Irish shares falling by around 4pc.

This has been out of sync with actual corporate performance in many cases.

It hasn't been management's fault but merely reflects international events from Brexit and Trump, to concerns about China.

Many well-run Irish companies like Kerry Group, Glanbia and Kingspan should benefit if Britain moves towards a slightly softer Brexit and Trump bolsters the dollar and the US stock market through spending and lower Corporation Taxes.

Sunday Indo Business

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