Tuesday 23 October 2018

Dan O'Brien: The good times are rolling - so long as no fool tries to start a trade war...

The economy is powering ahead on almost every front, but Donald Trump poses a clear and present danger, says Dan O'Brien

MELTDOWN: Trump’s tariffs on iron and aluminium now pose the biggest and most immediate threat to the Irish economy.
MELTDOWN: Trump’s tariffs on iron and aluminium now pose the biggest and most immediate threat to the Irish economy.
Dan O'Brien

Dan O'Brien

Economics is called the dismal science. There is nothing dismal about the performance of the Irish economy right now. The same could be said of the economies of Europe and the US, with which we do so much trade.

This is all happening at a time of political upheaval. Analysts of "political risk" have never been in such demand, what with Trump, Brexit, Putin, the rise of populism, the threat of hyper terrorism, a Middle East in flames and much else besides. But one of the striking features of the boom conditions across most of the western world is that they are being enjoyed despite so much political uncertainty.

That is also the case here. The Government is weak. Few ministers are delivering. Most are shying away from anything that might spark controversy. After two near-death experiences last year, it would not take much for Micheal Martin to feel he has no option but to pull the plug on the minority government he props up. Despite all of this, and the unprecedented uncertainties and risks thrown up by Brexit, the Irish economy is doing incredibly well.

Last week saw an unusually large amount of economic data published by the State's statisticians. Almost every new data point - and there were many - showed an economy that is powering ahead.

When the entire dashboard of economic indicators is surveyed, the picture is equally rosy (for those interested in more detail, I crunch the numbers in an accompanying column in the business section of this newspaper).

Jobs and output surged ahead in 2017. Although Ireland was not "the fastest growing in Europe" by any meaningful measure, it was one of the best performers. The few indicators that are available for early 2018 suggest that there has been no let-up in the pace of growth this year.

The domestic economy is in something akin to a Goldilocks phase right now: neither too hot nor too cold. Every region and every sector is on the up (some more than others, admittedly), while overheating is still some way off.

Consumer price inflation remains non-existent - prices are rising at one of the slowest rates in the EU. Indeed, with the overall price level rising by just fractions of 1pc in recent years, it remains below pre-crash levels. One has to go back to the 1930s to find a decade in which there was so little inflation.

Wage inflation is now much higher, but that is not a worry. Pay growth finally picked up in 2017. That is to be welcomed, as it puts more money into people's pockets, but it does not have to be feared. At around 2pc, it will be some time before wage inflation becomes a problem for the economy's competitiveness.

The only possible sign of overheating is the property market, where last week's first reading of the year - for the month of January - showed continued double-digit annual rates of increase.

But even here, there is limited cause for concern from a wider economy perspective (there is plenty of reason to be concerned for the people who are having trouble finding a place to live).

High property price inflation would be much more unhealthy if it were being driven by credit, as it was in the year up to 2007. But it is not. In fact, the latest figures from the Central Bank show that total household borrowing is finally beginning to stabilise after a decade of contraction. When household credit is measured relative to disposable incomes, it continues to fall. As it is excessive credit that causes bubbles, rising house prices at the moment are not even close to bubble territory.

The housing problem, then, is not the result of excessive credit fuelled demand but of insufficient supply: the population that has grown by more than 400,000 since home-building collapsed a decade ago.

But there is light at the end of the tunnel, as the building industry gets back on its feet. Last Thursday's figures showed that spending on home-building grew by a third last year, more than any year on record. The accelerating pace of the construction recovery means that the supply of new houses and apartments will rise towards the numbers demanded this year and in the years to come.

Could it all go wrong? In the short-term, it is hard to see a domestic shock having much of an impact on the economy as there are no big weaknesses, such as a credit bubble, which could halt the expansion. The biggest short-term domestic risk is that the business cycle simply kicks in. The current expansion is, after all, more than half a decade old and could simply run out of steam, although that seems unlikely in 2018 given the momentum in the Irish and western economies.

Externally, a sharp increase in interest rates would certainly take at least some wind out of the economy's sales. But Frankfurt is poised to follow the US with a gradual return to more normal rates over the medium-term, so the risk from much higher debt servicing costs for households and businesses is low in 2018.

A much bigger worry is financial markets. By so many measures, global asset prices of all kinds have been rising rapidly for years now. If there is a bubble internationally, a re-run of the crash of 2008 cannot be ruled out. If that happens, all bets are off.

The risks posed to the Irish economy by Brexit are well known and much discussed. The impact could be felt this year if exit talks fail and sterling takes a plunge. If no deal is agreed and Britain leaves in 12 months time, businesses and consumers here could well pull in their horns well before departure day.

Recently another threat has become galloped up the agenda. Over the past couple of weeks Donald Trump has threatened Europe with two separate rounds of protective tariffs. Anyone with even a passing interest in economic diplomacy knows that such measures are always met with counter measures. If the country that takes the first measure insists on taking the last, then a downward spiral of tit-for-tat tariff impositions becomes inevitable.

Trump is not known for accepting he won't have the last word on any issue.

In recent years the US has overtaken Britain as Ireland's largest single trading partner. Exports to the US are currently worth more than €25,000 per person at work in Ireland, far more than any other European country.

Despite the warm words at the White House last week, Ireland will not be spared if the EU and the US become mired in a trade war.

With matters on a knife edge this weekend, Trump's tariffs now pose the biggest and most immediate threat to the Irish economy.

Twitter: @danobrien20

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