Monday 10 December 2018

David McWilliams: Why Trump and Brexit won't spoil 2017 for Ireland

Political class is in spasm, but our economy need not fear turbocharged Trump in office

People perform morning exercises against the backdrop of Shanghai’s financial district. Chinese investment in Donald Trump’s America is likely to cause US assest prices to soar. Photo: Getty
People perform morning exercises against the backdrop of Shanghai’s financial district. Chinese investment in Donald Trump’s America is likely to cause US assest prices to soar. Photo: Getty

David McWilliams

Most forecasters are arguing that the Irish economy will slow down in 2017 - but there are valid reasons for believing that the economy will accelerate from here.

We are now in the fourth year of a recovery. Normally, this gives rise to worry, because all economies have cycles and most cycles are five- or six-year affairs. Therefore, we should be factoring in a peaking and a levelling off of activity.

There are also the shocks of Brexit and Donald Trump to contend with. Lots of people believe that these political events are, by definition, bad for Ireland economically; I think the opposite will be the case.

The UK is much more likely to experience a debt-fuelled boom in the next two years - more likely to be driven by an ongoing middle-income housing boom in the south than some sort of post-Brexit recession. Even if there is a 'hard Brexit' and EU tariffs are imposed on British goods, these tariffs are likely to be modest. In reality, the UK economy is large enough and strong enough to withstand a short trade fracas with the EU - and it will be short. The froth will be blown off the top of the London property market - and that's a good thing - but England suffers from a housing shortage in a country where incomes, employment and the population are all growing.

In addition, the UK has its own currency, so lots of pain is reflected in the currency, and even here the worst is over.

In the USA, it is clear that Mr Trump is going to be like Reagan on steroids. It will be game, set and match to corporate America. The ideology of his politburo of plutocrats is outrageously transparent, and can be summed up by the expression: "The business of America is business".

This means that the budget deficit will be expanded dramatically, and the dollar is likely to go through the roof. Janet Yellen in the Federal Reserve will put up interest rates, but with the economy close to full employment, the net result will be like an America of the 1980s. Profits will soar and Chinese money escaping China will have the same effect on American asset prices that Japanese money had in the 1980s.

Obviously, with such a narrow business focus in the cabinet, legislation to drive up earnings will be enacted. In short, profits more than patriotism will dominate Mr Trump's America.

The new story that will be sold to the American people will be about explaining that in order to make America great again, Mr Trump first has to make America rich again.

Thus, the rich will get richer while the poor will get job opportunities in the expanded public works schemes that the Trump administration envisages. So we have Reagan on speed.

For Ireland, these two developments are positive because an internally combusting UK is good for Irish tourism and agriculture. In addition, a Britain in a trade scrap with the EU implies that the 50/50 investment decisions that an emboldened corporate world makes in Europe will favour Ireland over Britain.

The question is whether corporate America continues to invest abroad, particularly given the Trumpian rhetoric about bringing American capital home and replacing corporate outsourcing with insourcing.

In this regard, we come back to the earlier point about the business of America being business. Despite what was said in Wisconsin at election time, it is quite unlikely that those business titans at Mr Trump's cabinet table will back full-scale protectionism that would imperil the global interests of American business.

Mr Trump and those around him understand they need to sell their goods to rich Europeans and they need Chinese savings to buy the American IOUs that are going to be needed to rebuild American infrastructure.

It's obvious that Mr Trump will try to bring back a few factories from Mexico (and this also suits his domestic race agenda) but the idea that corporate America is about to retreat from the world makes no business sense. Only initiatives that make business sense will pass Mr Trump's cabinet.

Mr Trump is more Reagan than Roosevelt. Like Ronald Reagan, he will split the world into friendly countries and unfriendly ones and will behave accordingly. In the pantheon of American bogeymen, China is to Mr Trump what the Soviet Union was to Mr Reagan. American relations with Asia are much more likely to change than American relations with Europe.

Back to Ireland, and I see the main drivers of economic growth here - apart from foreign investment, tourism and exports - are demographics, income, interest rates, house prices and taxes.

Ireland's demographics are strong. The population is growing and this typically presages strong spending growth, provided incomes are growing. Obviously, the most important determinant of income is employment, and employment is growing impressively. So incomes are growing too. Interest rates are also crucial, not least because this is a highly indebted country. Thanks to Europe's travails, eurozone rates will remain historically low, facilitating a gradual strengthening of Irish balance sheets.

Many ordinary family balance sheets in Ireland have still not recovered from the property crash. Low interest rates help this healing process. House prices are rising and will continue to rise. The impact on those people who own property is that they feel richer and, when they feel richer, they tend to spend a bit more. This will be a feature of 2017.

Finally, it seems that taxes will not rise any further from here, unless the State decides to give away more goodies at budget time or grant a massive pay increase to the public sector that will have to be paid for by the rest of us.

Taken together, there is very good reason to be optimistic, economically at least, about 2017.

Right now, the story is that the world is about to end with Brexit and Mr Trump. This seems plausible because we are entering different times. But just because the background noise is different, it doesn't mean that the economy has to go into some sort of spasm.

The spasm is occurring in the political class, who have seen their old certainties rocked, but for those of us faced with change all the time, 2016 was business as usual.

2017 is going to be more of the same. All the small decisions that each of us makes every day - the decisions that drive the economy - are likely to be made, no matter who runs the show in the White House or Whitehall.

Irish Independent

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