View from Dublin: volatile cur­rency and huge debts could yet de­rail us

Belfast Telegraph - Business Telegraph - - Small Business Can - BY BREN­DAN KEENAN

De­spite all the al­go­rithms, al­phas, be­tas and the rest by which fi­nan­cial mar­kets make their im­pen­e­tra­ble way, cur­rency move­ments re­main a mys­tery. Which is a pity, be­cause never in our eco­nomic his­tory has the mys­tery mat­tered more.

There was 1991, of course, when ster­ling’s forced exit from the Euro­pean cur­rency sys­tem pro­voked a run on the Ir­ish pound and the Cen­tral Bank used up all its re­serves in the ul­ti­mately doomed at­tempt to main­tain the Ir­ish cur­rency’s value.

But at least one knew that cri­sis would come to an end, one way or the other. There is now no Ir­ish pound to de­fend, al­though if things were to go re­ally badly, there could be a run on Ir­ish gov­ern­ment loans, push­ing up in­ter­est rates and mak­ing the re­place­ment of debt due for re­pay­ment more ex­pen­sive and dif­fi­cult.

This dan­ger was re­ferred to in the most in­trigu­ing pub­li­ca­tion of two weeks ago — the ‘Na­tional Risk As­sess­ment’ from the gov­ern­ment — an­other part of the analysis-fest cre­ated by the cri­sis. It tries hard to avoid fright­en­ing the horses but care­ful read­ing makes it scary enough.

It says the risks to Ire­land’s long-term debt sus­tain­abil­ity re­late mostly to changes to the eco­nomic out­look; pri­mar­ily the growth prospects of key trading part­ners and the im­pact of changes on the in­ter­na­tional trading en­vi­ron­ment.

Brexit is the big­gest threat to the eco­nomic out­look and the trading en­vi­ron­ment, which is where the cur­rency comes in. The mys­tery of cur­rency move­ments means there is no re­li­able an­swer the ques­tion of whether ster­ling will reach par­ity with the euro, or where it will go at all.

On the other hand, it is of­ten fairly clear why past move­ments took place, as well as the im­pact they had on economies. This is al­ready the case with ster­ling’s re­cent fall. A new Eco­nomic Letter from analysts at the Cen­tral Bank sees sig­nif­i­cant ef­fects last year — and much has hap­pened since then.

The main ef­fect was on con­sumer prices. The paper finds that the low rate of Ir­ish in­fla­tion in 2016 was largely due to the weak­ness in ster­ling af­ter the vote to leave the EU.

Not sur­pris­ingly, changes in the euro-ster­ling ex­change rate have a big­ger im­pact on Ir­ish prices than shifts in other cur­ren­cies. The trend seems to be ac­cel­er­at­ing, with in­fla­tion in the euro area reach­ing 1.4%, while prices in Ire­land fell by 0.2% in the 12 months to July.

The ECB may soon cut back on the flow of new money de­signed to avoid de­fla­tion, and even be­gin to in­crease in­ter­est rates if core in­fla­tion, which ex­cludes en­ergy, goes much above 1%.

That would be un­wel­come news for a heav­ily in­debted gov­ern­ment and private sec­tor such as Ire­land’s; in­creas­ing the al­ready high ‘real in­ter­est rate’ which com­pares the ac­tual rate with in­fla­tion. But as al­ways with this econ­omy the text­book is of lit­tle use, as two re­cent pieces of data show.

Re­tail sales fig­ures show that, ex­clud­ing cars, pur­chases rose 7% in the 12 months to July.

The 6% fall in car sales is be­ing at­trib­uted to cheaper UK im­ports; a strik­ing ex­am­ple of how the cus­tomer’s gain can be a re­tailer or pro­ducer’s loss and a mi­cro­cosm of pos­si­ble fu­ture trends.

Com­pa­nies who are sup­ply­ing the home mar­ket will ben­e­fit from what could be a con­sumer boom.

Al­ready, the sales of house­hold goods are ris­ing at a double digit pace.

The Ja­panese de­fla­tion ogre, where peo­ple post­poned pur­chases in the belief that prices would fall fur­ther, does not ap­pear to op­er­ate in Ire­land. Per­haps that is not too sur­pris­ing ei­ther.

It helps that real in­comes are ris­ing faster than real in­ter­est rates. Av­er­age earn­ings rose by 2% in the first half of this year com­pared with 2016.

Ir­ish house­holds are spend­ing more and si­mul­ta­ne­ously re­duc­ing their debt.

Like much to do with Brexit, the full po­lit­i­cal and eco­nomic ram­i­fi­ca­tions have still to be felt.

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