Wednesday 26 June 2019

US downturn may be a greater risk to Ireland than Brexit

 

UK Prime Minister Theresa May will be hoping to hammer out a favourable trade deal with US President Donald Trump if Brexit proceeds
UK Prime Minister Theresa May will be hoping to hammer out a favourable trade deal with US President Donald Trump if Brexit proceeds
Pharma over farms: Multinational chemical and pharma exports dwarf Ireland’s agriculture industry’s output
Driving the economy: Google's new apartments under development in Boland’s Quay. The tech giant alone currently has a footprint of just under 1.2m square feet sq ft in the Dublin office market.
Trouble on the horizon: Brexit could inflict deep damage upon agriculture and the agri-foods industries

David Chance

On the face of it, a cliff-edge Brexit is the biggest risk of 2019.

Yet it is a "known unknown" and, while its effects will be severely damaging to some parts of the economy, they will also likely be narrow.

A greater risk may be a sharp slowdown in growth in the United States, where the economy has been on a decade-long expansion - set to be the longest in history - thanks to the easy-money policies of the Federal Reserve in the wake of the 2008 financial crisis.

Like it or not, Ireland's fate is more closely tied to the US pharmaceuticals and tech giants that have made their home here over the past decade than to agriculture, which is set to bear the brunt of a Brexit-induced rise in tariffs.

Pharma over farms: Multinational chemical and pharma exports dwarf Ireland’s agriculture industry’s output
Pharma over farms: Multinational chemical and pharma exports dwarf Ireland’s agriculture industry’s output

And for all the talk of a hard Brexit, there looks like an increasing likelihood that some version of Theresa May's deal will pass as most UK MPs are opposed to a no-deal scenario, which means that doom-and-gloom scenarios for Britain's economy and Ireland's exports are likely overdone.

As the US economy slows, President Donald Trump may ramp up his trade war rhetoric and action, not only with China, but also with the European Union.

Both the EU and Ireland run substantial trade surpluses with the US.

Neil Shearing, chief economist at consultancy Capital Economics, is forecasting that growth in the United States will fall sharply from 2.9pc this year to 2.2pc next year and to near-stall speed at 1.2pc in 2020 before rebounding.

That is a far more dramatic fall than the consensus - the Organisation for Economic Cooperation and Development is looking for a much more moderate slackening in the pace of US growth to 2.7pc next year and 2.1pc in 2020.

"The main point to emphasise is that we expect the global economy to slow next year, and by more than most currently anticipate," Mr Shearing said. "This slowdown will be led by the US, where a combination of tighter monetary policy and the fading effects of this year's fiscal stimulus will start to drag on activity."

Driving the economy: Google's new apartments under development in Boland’s Quay. The tech giant alone currently has a footprint of just under 1.2m square feet sq ft in the Dublin office market.
Driving the economy: Google's new apartments under development in Boland’s Quay. The tech giant alone currently has a footprint of just under 1.2m square feet sq ft in the Dublin office market.

Mr Shearing forecasts economic growth for the world of 3pc in 2020 which, if it turns out to be correct, would be the slowest growth since 2000.

For a highly-globalised economy like Ireland's, that spells trouble. The 7pc-plus growth rates seen here in recent years have been driven by trade and by investment by US multinationals - and there may be worse to come as the 2020 primaries loom and Trump ramps up his anti-trade agenda.

The industries affected by trade tensions between the EU and the United States account for a far greater share of exports and growth than the sectors that will be directly hit by Brexit.

According to IntertradeIreland, just 2pc of goods produced here will incur tariffs of more than 35pc in the event of a hard Brexit in which Britain moves to trade on the same terms as most of the rest of the world.

Much of the direct damage from Brexit will be narrowly focused, although very deep and damaging for those affected, and will be inflicted on agriculture and agri-foods as well as logistics.

While important, especially for jobs, these industries are dwarfed in Ireland's overall economic data by just three industries that make up 85pc of exports - chemicals and pharmaceuticals, medical devices and aircraft leasing.

Trouble on the horizon: Brexit could inflict deep damage upon agriculture and the agri-foods industries
Trouble on the horizon: Brexit could inflict deep damage upon agriculture and the agri-foods industries

In terms of the value of goods and services produced in 2017 - the latest full year for which figures are available - in an economy worth €272bn, agriculture directly accounted for €2.7bn of gross value added and the agri-foods industry a further €9.1bn.

Those figures are reflected in tax data and nearly 90pc of trading profits were attributable to five sectors, manufacturing, financial and insurance, information and communications, wholesale and retail, and administrative and support services. Among the top 100 payers of corporation tax, 51 were American and paid €4.25bn into the Exchequer.

In contrast, there were fewer than 10 British companies in the top 100 - paying just €128m.

Recent research from the National Treasury Management Agency (NTMA) examined Ireland's dependence on the US and found that a 1pc fall in US economic output led to a 1.01pc decrease in gross value added here.

In terms of tax, that would mean a €300m decrease in corporation tax receipts over five years.

"When the US economy expands, Ireland expands at a faster rate. Similarly, when the US economy weakens, Ireland's economy again contracts at faster rates," NTMA economist David Purdue wrote.

"The results imply that while shocks to the UK economy can impact Ireland - and will assuredly do so in the case of Brexit - thanks to the stronger economic links, shocks from the US can probably have a larger impact on Ireland."

Capital Economics forecasts that in the event something close to Mrs May's deal passes, British economic growth would accelerate from a likely 1.3pc this year to 2.2pc in 2019 as uncertainty is the biggest factor in the outlook. Sterling could then recover to €1.21 from €1.11 at present, which means that Irish goods would become more competitive in the UK.

Concentration extends to jobs, and Mr Purdue estimates that 11pc of US company jobs here are at just four companies - Amazon, Apple, Google and Facebook - whose shares have plunged since October.

They have emerged as major players in commercial property - Google alone has a footprint of just under 1.2m sq ft in the Dublin office market.

If President Trump's eye does turn to more protectionist measures, the size of Ireland's trade surplus will not escape his gaze. The country is the EU's 12th-largest economy and is home to just 1.75pc of the bloc's output, but at the end of October it accounted for 17.5pc of the overall trade surplus of €114.8bn that the EU had with the United States.

The ballooning of the US trade deficit to a 10-year high in October does not appear to have changed Mr Trump's mind on trade policy.

On December 4 last he boasted on his Twitter account: "I am a Tariff Man. When people or countries come in to raid the great wealth of our Nation, I want them to pay for the privilege of doing so."

In the background, continued pressure on government finances around the globe is leading to a tightening of the noose around tax havens.

The US has advanced its own proposals for global reform in a bid to head off the EU's digital services tax, which may ensnare Ireland.

Ireland has benefited the most of any country from profit-shifting by US companies. According to University of California, Berkeley, academic Gabriel Zucman, 80pc of the profits are moved to low-tax countries in the bloc, such as Ireland, Luxembourg and the Netherlands - all characterised elsewhere as tax havens.

He estimates that about half of the foreign profits of US multinationals have been booked in tax haven affiliates, with Ireland - which disputes such a description - accounting for 18pc.

Mr Zucman also estimated that by 2015 the State had attracted the largest share of shifted profits globally at $100bn.

The State's relatively high level of corporation tax receipts as a percentage of overall revenues is indicative of profit-shifting, Mr Zucman says. Ireland collected 11.5pc in 2016, compared with 5.2pc in Germany.

A profit-to-wage ratio of the foreign multinational sector here has surged a "truly exceptional" 800pc from levels of around 25-30pc in the 1970s - yet another indicator of profit-shifting.

In the October Budget, the Government made a bet that any US slowdown will be short-lived and that countries including France will fail to grab a bigger slice of the tax revenues now paid here by multinationals.

It is no accident that the European Commission highlighted these issues over Brexit, in its most recent economic outlook assessment.

"Ireland's economic outlook is subject to significant uncertainties related, inter alia, to changes in the international taxation and trade environment. A large degree of unpredictability remains linked to the activities of multinationals, which could drive headline growth either up or down," it said.

Irish Independent

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