Sunday 19 November 2017

China crisis all but forgotten as revolt of Western electorates tears up the play book

Downbeat start to 2016 for money markets was followed by even bigger shocks for investors and economy, writes Colm Kelpie

Donald Trump and Nigel Farage may have delighted in their 2016 successes, but Fed Chair Janet Yellen said the former’s election to US President-elect put the central bank under a “cloud of uncertainty”.
Donald Trump and Nigel Farage may have delighted in their 2016 successes, but Fed Chair Janet Yellen said the former’s election to US President-elect put the central bank under a “cloud of uncertainty”.
Colm Kelpie

Colm Kelpie

When 2016 kicked-off, it looked like China would be dominating the global economic headlines for the coming months.

Billions were wiped from shares around the world in just days at the start of January amid convulsions in Chinese trading rooms, in what was a dramatic and pessimistic start to the year for the international money markets.

The turmoil echoed the ­previous summer when the Chinese central bank staged a devaluation of the yuan and sent shockwaves around global markets.

By mid-January, the International Monetary Fund downgraded its global growth forecast, with China largely to blame. All the talk was about the slowdown in the world's second-biggest economy.

Twelve months on, and it's the West where most observers see a crisis.

I wonder in those opening weeks of 2016 how many expected that the year would end with Donald Trump elected to the White House and Britain preparing to pull out of the European Union.

European Commissioner for Competition Margrethe Vestager was ciritical of the relationship between the Irish Government and Apple. Photo: Getty
European Commissioner for Competition Margrethe Vestager was ciritical of the relationship between the Irish Government and Apple. Photo: Getty

Politically and economically, 2016 will be remembered not for the events that kicked off the year in China, but for the seismic changes brought about by voters in the United Kingdom and United States.

Brexit and the surprise election of Trump as US President represented a stunning rejection of the status quo.

The former presents fundamental challenges for the European Union, while the latter has thrown a wild card into the world of international diplomacy, with Mr Trump on the campaign trail eschewing traditional alliances, touting warmer relations with Russia and taking a tough line on China.

The winning campaigns had fired up voters in both countries who, in many cases, felt left behind by the economic recovery and marginalised by the march of globalisation and multiculturalism.

Tim Cook and Enda Kenny
Tim Cook and Enda Kenny

The arguments of the victors, as well as the extent to which those arguments resonated with the public, were underestimated by the establishment and media.

Ahead of the votes, economists warned of the potential negative effects on the world financial order of both the departure of the UK from the European Union and a Trump Presidency.

Brexit had an immediate, although relatively short-lived impact on global stock markets, and an equally sudden although much more prolonged effect on sterling.

The surprise election of billionaire businessman Trump has so far had a more muted response.

The early 2016 turmoil in China was eventually overshadowed in spectacular fashion
The early 2016 turmoil in China was eventually overshadowed in spectacular fashion

Markets responded negatively as it emerged he was set to take the White House, then bounced on his loose spending plans. The long-term effects remain to be seen. If he follows through on some of the strident policies he talked up on the campaign trail - around immigration, tax and global trade, to name but a few - expect the international economy to take a hit, experts have warned.

Both results have injected uncertainty into the global economy for the coming years, because at this stage it is much too early to tell for certain what impact either event will have.

In terms of Brexit, Ireland has the most to lose of any European country given the close economic, political and societal links between the two states.

In the wake of the vote, the Department of Finance shaved about 0.5 percentage points off its growth forecasts for next year.

A joint paper by the Department of Finance and ESRI calculates a so-called hard Brexit would leave Irish economic output around 3.5pc below what it otherwise would have been.

Even under a soft exit, in which the UK retains access to the single market and allows free movement of people, Irish GDP would be about 2.3pc lower after five years. Neither scenario takes into account any measures the Government may take to mitigate the fallout.

The paper, published last month, was prepared by economists to shed light on how the departure of the UK from the EU would affect Ireland's economy in terms of growth, unemployment and public finances.

The threats have been well documented, and include the impact on Northern Ireland and the potential reimposition of a border, the threat of customs costs and tariffs hindering the €1.2bn of trade across the Irish Sea every week, possible restrictions on the free movement of people and goods, the energy implications and the status of Irish citizens living in the UK.

These are potential repercussions, but for Irish exporters to Britain and border retailers, the slump in sterling has already been a costly and immediate negative.

The pound slumped about a fifth against the euro in the wake of the June 23 vote hitting about 90 pence, and tumbled to a 31-year low against the dollar.

Although its has recovered over the last six weeks to steady around 85 pence, the devaluation has hit exporting businesses here badly, particularly in the agri-food sector, as well as border businesses.

And there's little if anything to suggest the pound could get any stronger in the coming months, as 2017 begins where 2016 ended, in a dense Brexit fog.

Prime Minister Theresa May appeared before a parliamentary committee just days before Christmas but offered little more detail on her plans for Britain to leave the European Union, repeating that she wanted to win the best deal and would not compromise her negotiating stance.

She dangled the prospect of a little more information in the new year, saying she would make a speech then.

While an easing of concerns over a hard Brexit had led to a 5pc recovery in sterling against the dollar between mid-October and mid-December, after the High Court ruled that the UK government could not trigger formal Brexit talks without parliamentary approval, that rebound was ended abruptly in the middle of December by the US Federal Reserve.

After hiking interest rates for the first time in a year, the Fed indicated that rates could rise as many as three times in 2017, having flagged just two likely hikes in September. That sent the dollar soaring.

Following the unanimous rate decision, Fed Chair Janet Yellen said Donald Trump's election had put the central bank under a "cloud of uncertainty" and already prompted some policymakers to shift their view of what's to come.

The projected three rate increases next year would be followed by another three increases in both 2018 and 2019 before the rate levels off at a long-run "normal" 3pc.

That is slightly higher than three months ago, a sign the Fed feels the economy is still gaining traction.

Back home, the Irish economic recovery continued, if not apace then at least unchecked. The driver of growth has shifted from exports to domestic spending. However, that won't last forever, even if the housing market recovers.

And then there's Apple.

The European Commission ordered the technology giant to pay a record-breaking €13bn in back taxes to the Government. It had been a long time coming.

The probe had been ongoing for more than two years, but the scale of the fine came as a surprise.

The EU found that Apple got an unfair advantage as a result of tax rulings it received from the Revenue in 1991 and 2007.

"Member States cannot give tax benefits to selected companies - this is illegal under EU state aid rules," Ms Vestager said.

Both Apple and the Government, disagreed. The fine made headlines around the world and precipitated a fierce reaction from the iPhone maker, who accused the Brussels body of an attempt to rewrite Apple's history in Europe, ignore Ireland's tax laws and "upend the international tax system in the process".

Just days before the verdict, the US government made its feelings clear, amid speculation the Commission would rule against Apple.

State aid investigations by the European Commission involving a number of American companies, including Apple, are inconsistent with international norms and undermines the global tax system, the Treasury warned.

Both the Irish Government and Apple have lodged appeals against the decision with the European courts, kicking off a legal battle that could last for a number of years.

In the meantime, Ireland's decades-old model of being a low-tax middle-man bridging the divide between US corporations and European markets has never been under more strain.

Elsewhere at home, public sector pay unrest was a continuing threat, with teachers, gardaí, train and bus drivers all warning of walk-outs.

As the economy continues to recover, expect further pay demands.

The past year heralded the onset of a rapidly shifting world order. Its effects - politically and economically - are likely to become more apparent in 2017.

Irish Independent

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