Thursday 27 June 2019

Global political upheaval has yet to affect economy - but it's early days

Marine Le Pen, the National Front’s candidate in the upcoming French presidential election, speaks at a rally. The poll ratings of the anti-establishment, far-right politician have caused a minor panic in the French government bond market but have not yet spooked the wider economy. Photo: Robert Pratta/Reuters
Marine Le Pen, the National Front’s candidate in the upcoming French presidential election, speaks at a rally. The poll ratings of the anti-establishment, far-right politician have caused a minor panic in the French government bond market but have not yet spooked the wider economy. Photo: Robert Pratta/Reuters
Dan O'Brien

Dan O'Brien

Political instability and upheaval have been to the fore over the past year: on this island, south and north, on our neighbouring island, on the continent, and across the Atlantic. Yet despite all the uncertainty, which might have caused consumers and businesses - from eastern Europe to America's west coast - to pull in their horns, economic momentum in the Western world has gathered pace of late.

Here at home, Tuesday's quarterly employment report from the State's statisticians showed yet another surge in job creation in the final months of last year.

The continued strong jobs growth led to an important threshold being passed: excluding the construction sector, the numbers at work have now reached the highest level in this State's history, surpassing the previous peak almost a decade ago.

All 14 industry sectors counted by the statisticians added employees over the same period a year earlier. All eight regions of the country had more people at work too. Joblessness is falling by whatever way one cares to measure it.

Those who were hit hardest in the recession are also benefiting from the improving jobs market.

The share of all young and low-skilled adults who are in employment has been on the rise, even if there is still a long way to go before levels get back to those of pre-crisis times for these groups.

All of this happened despite an inconclusive election a year ago, the slow and often painful birth of the era of 'new politics", the shock of Brexit and Sterling weakness, and the election of US President Donald Trump.

Last year's jobs boon also took place against the backdrop of somewhat sluggish consumer spending, exports to the UK taking a hit from the aforementioned exchange rate movements, and a marked weakening of growth in revenues flowing into the Government's coffers in the second half of 2016.

While your columnist does not want to live down to the 'dismalist' reputation of economists, it should be said, too, that positive labour market developments are rarely a good indicator of what is to come for an economy.

An important reason for this is because employers react to changing market conditions with a delay. Employment is therefore a "lagging indicator", and thus not a good pointer when it comes to future activity.

With that cautious caveat aside, let's get back to the cheerier trends from across the Western world.

The British economy has continued to grow solidly despite the looming (and huge) changes to that country's economic relations with Europe that are coming down the line.

The American economy, which has been motoring nicely for some time, will accelerate if the strong upticks in consumer and business confidence since last November's presidential election are reflected in more spending and investment.

Perhaps most welcome is the continued strengthening of the continental European economy. It has been a decade since the eurozone has expanded at its current clip.

The decoupling of a darkening political outlook from an improving economy has been more marked in some eurozone economies than others.

Spain has been an example of great divergence. It had even more domestic political uncertainty recently than Ireland - with two inconclusive elections within half a year - yet it continues to recover strongly.

If Spain is coming to terms with a 'new politics' akin to ours, France is an even more obvious case of an economy that has shrugged off big shocks, both past and potential.

No western European country has endured as many acts of hyper-terrorism in recent times as France.

Yet apart from some weakening in visitor numbers, it is hard to find any effect in economy-wide data. What's more, the very latest figures suggest that the French economy is not only growing more strongly in 2017, but that it may even be overtaking Germany in its pace expansion.

That is all the more remarkable given that a new president may be moving into the Elysée Palace in Paris in 10 weeks' time who wants France to leave not only the EU but also the euro. These are the policies advocated by Front National candidate Marine Le Pen.

This risk is now causing a minor panic in the French government bond market, but it has not (yet) spilt over from financial markets into the real economy.

So what's going on? Has politics become less important in the functioning of economies?

The answer is probably not.

In Ireland and Spain, where political vacuums existed for months after elections without clear-cut outcomes, caretaker governments kept things ticking over. The new, weaker governments which took office in both countries have both shied away from taking some difficult decisions, but the negative effects of greater inertia are slow burning and felt only over the longer term.

And then there is Brexit. In Britain, some of those who advocated a vote in favour of leaving the EU are now saying that because the economy is doing well, everything will be hunky dory. The obvious retort is that Brexit hasn't happened yet: there have been no new barriers to cross-border commerce and businesses have yet to deal with changes to trade rules.

The wildest political card of all is Mr Trump. But as he has been in office for just over a month, it is too early to know for sure if he will prove economically inept, and far too soon to know what effects his actions will actually have on the living standards of the average American.

Modern economies are a bit like smart phones: easy to use and even easier to take for granted in how they function. But the processes that make them work are massively complex. Drop your phone and you can all too soon find out how fragile it can be.

If the political centre continues to fray, sooner or later the effects will be felt in pockets and purses.

Irish Independent

Today's news headlines, directly to your inbox every morning.

Don't Miss