Winds of change could blow a hole in the old cer­tain­ties

Belfast Telegraph - Business Telegraph - - Public Sector Jobs - By Richard Ram­sey, Ul­ster Bank chief econ­o­mist @Ub_e­co­nomics

We are cur­rently in At­lantic hur­ri­cane sea­son, and with five ma­jor hur­ri­canes to date it looks like it will be the most ac­tive one in around seven years, as well as the costli­est ever.

With the Brexit vote and Trump, it could also be said that we are mov­ing into a very un­set­tled eco­nomic and po­lit­i­cal weather sys­tem. In­deed, it is per­haps the stormi­est fore­cast, eco­nom­i­cally and po­lit­i­cally, the UK and US have faced since around 2010.

Back then, we were be­gin­ning the re­cov­ery process from what was con­sid­ered by many to have been a per­fect storm. This com­prised a world­wide re­ces­sion cou­pled with a global fi­nan­cial cri­sis. In the seven years since then, we have been clear­ing up the dam­age caused, in par­tic­u­lar to the public fi­nances.

It could be said that the re­sult­ing pol­icy mea­sures have cre­ated an­other storm — aus­ter­ity. Though it seems that Storm Aus­ter­ity may fi­nally have blown it­self out — po­lit­i­cally, at least.

But, aus­ter­ity aside, the past three years have largely been a set­tled pe­riod with low in­fla­tion, wage in­creases, record em­ploy­ment, low unem­ploy­ment, and con­tin­u­ous eco­nomic growth.

How­ever, some would say we aren’t fix­ing the roof while the sun is shin­ing. The public fi­nances are still in a frag­ile state and in­ter­est rates re­main at a 323-year low.

This doesn’t leave much scope for mone­tary or fis­cal pol­icy ac­tion should the cli­mate be­come tur­bu­lent. And econ­o­mists are now sound­ing some ma­jor eco­nomic weather warn­ings.

On the one hand, we have the end of what has been re­ferred to as the ‘con­sumer sweet spot’.

This re­sults from ris­ing in­fla­tion — cur­rently Con­sumer Price In­fla­tion is run­ning at 2.9% yearon-year — with food, fuel and en­ergy prices all mov­ing up sharply.

Mean­while wage growth is cur­rently sub­dued and markedly be­low the in­fla­tion rates.

The de­pre­ci­a­tion of ster­ling, par­tic­u­larly since the UK’S EU ref­er­en­dum re­sult, has been a ma­jor fac­tor be­hind ris­ing prices, as it has made im­ports more costly.

The big­ger warn­ings, though, are at a macro level. In­deed, it could be said that we are see­ing more than storm warn­ings. We are ac­tu­ally see­ing changes to en­tire eco­nomic and po­lit­i­cal weather sys­tems. ‘Brump’ — Brexit and Trump — are re­align­ing the very es­tab­lished and pre­dictable pat­terns of global trade.

Last year, there­fore, looks to have been the peak for trade lib­er­al­i­sa­tion. Moves to cre­ate a Trans-pa­cific Part­ner­ship trade deal and a Euro­pean equiv­a­lent — the Transat­lantic Trade and In­vest­ment Part­ner­ship — have al­ready been scup­pered by the cur­rent US Pres­i­dent. These ini­tia­tives, years in de­vel­op­ment, were can­celled with a stroke of a pen ear­lier this year.

Mean­while Trump’s ad­min­is­tra­tion is also seek­ing to dis­man­tle the North Amer­i­can Free Trade As­so­ci­a­tion.

The era of part­ner­ship looks set to be re­placed by one of in­creased pro­tec­tion­ism. Trump’s ‘Make Amer­ica Great Again’ poli­cies put Amer­ica (and its econ­omy) first. Last week’s (pro­vi­sional) de­ci­sion by the De­part­ment of Com­merce to levy a 220% im­port tar­iff on aero­planes from Canada pro­vides an in­di­ca­tion of Trump’s di­rec­tion of travel.

It also pro­vides the con­text for those hop­ing to ne­go­ti­ate a favourable UK free trade deal with the US.

The North­ern Ire­land econ­omy — par­tic­u­larly our ex­porters — is po­ten­tially fac­ing an ef­fec­tive pin­cer move­ment from the US and Europe with Brexit.

In re­la­tion to the lat­ter, North­ern Ire­land’s agri-food sec­tor (no­tably beef and dairy) is vul­ner­a­ble if Brexit in­volves a move to­wards adopt­ing ex­ist­ing World Trade Or­gan­i­sa­tion tar­iffs.

The key ques­tion for the eco­nomic fore­cast­ers at this stage, though, is what cat­e­gory of Brexit are we go­ing to see? Will it be a ‘cat­e­gory five’ Brexit — ie a hard Brexit — with the UK be­ing com­pletely out­side the cus­toms union and sin­gle mar­ket and po­ten­tially very sig­nif­i­cant im­pli­ca­tions for for­eign di­rect in­vest­ment and the avail­abil­ity of skills? Or will it be a ‘cat­e­gory one’ Brexit — that is, the UK re­main­ing within the cus­toms union, with ac­cess to the sin­gle mar­ket and largely un­in­ter­rupted ac­cess to EU mi­grant work­ers?

Equally, will the cur­rent spat be­tween Boe­ing and Bom­bardier de­velop into a cat­e­gory four or five trade war be­tween the US and the rest of the world?

China and Asia are other clear clouds on the hori­zon. Gor­don Brown — the man who fa­mously coined the flawed phrase ‘ the end of boom and bust’ — last week warned about fi­nan­cial risks em­a­nat­ing from the world’s most pop­u­lous coun­try.

This fore­cast will cause alarm to many. In­deed, any coun­try that has had even a frac­tion of the credit ex­pan­sion that China has ex­pe­ri­enced has gone on to have a fi­nan­cial cri­sis. So, if we hear the term ‘Chi­nese credit crunch’, it might be time to bat­ten down the hatches.

How­ever, like the hur­ri­cane sea­son comes around ev­ery year, there are al­ways eco­nomic storms oc­cur­ring, and they won’t all be like the per­fect storm of 2007/8.

Even in the most dif­fi­cult cli­mates, good com­pa­nies and economies can sur­vive and thrive. Some even seize the op­por­tu­nity in the cri­sis.

The most im­por­tant thing is to con­trol what you can con­trol and to have a plan in place for po­ten­tial sce­nar­ios. There are lessons in this for North­ern Ire­land pol­i­tics and also for the UK in its Brexit ne­go­ti­a­tions. Fail­ing to plan is plan­ning to fail. Par­tic­u­larly when the weather turns.

Don­ald Trump looks to be aban­don­ing trade lib­er­al­i­sa­tion for pro­tec­tion­ism

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