Sunday Independent (Ireland)

We’re in firing line as Trump plays Russian roulette with economy

- Conall Mac Coille is chief economist at Davy CONALL MAC COILLE

AS if the risks from Brexit weren’t enough for the Irish Government to contend with, a flurry of macroecono­mic data this week underlined that the European economy slowed sharply towards the end of 2018.

The most eye-catching release was German GDP, stagnating at the end of the year, having seen a contractio­n through the summer. So Germany only narrowly avoided joining Italy in satisfying the technical definition of recession, two consecutiv­e quarters of negative growth. Overall euro area GDP grew by just 1.2pc in the final quarter of 2018, the slowest pace in five years.

Looking ahead, prospects seem little better. The Purchasing Manager Index (PMI) survey readings for the both the euro area (51.0) and UK (50.3) in January are consistent with, at best, stagnant growth. The consistent theme was that political uncertaint­ies, from Brexit, the stand-off between the EU Commission and Italian government on its fiscal deficit, or events in Turkey, are leading companies to delay orders or postpone investment plans.

Even the United States hasn’t been immune from concerns on growth. December’s retail sales fell by 1.2pc fuelling investor fears that the economy may be eventually headed into recession. In addition, President Trump’s Federal government shutdown is expected to weigh on growth in 2019. Of course, equity markets have bounced back in 2019, with the S&P500 up 9.5pc so far this year. However, that has reflected resilient corporate earnings and the change in tone from the Federal Reserve, highlighti­ng it will be ‘patient’ before raising the Fed funds rate above its current range of 2.25-2.5pc.

How worried should we be? Some of the slowdown in Europe no doubt reflects temporary factors, where the impact on the economy will fade. Car production in Germany fell 12pc during the summer and by 15pc in Italy during the winter. New emission standards have clearly disrupted car production, but output should begin to rise again.

However, the slowdown is now too broad and persistent to be explained by car production or the manufactur­ing sector — spreading into the services sector and domestic spending. A more compelling explanatio­n is the uncertaint­y caused by US/China trade tensions. Perhaps the threat to the global economy posed by ‘the Donald’ was initially underplaye­d because of his aggressive corporate tax cuts — helping US GDP grow by close to 3pc last year. However, this fiscal stimulus was only ever likely to have a transitory impact, with the US economy now expected to slow to 2.5pc growth this year and 1.8pc in 2020.

Instead, the disruption caused by the US administra­tion’s decision to impose 10pc tariffs on close to $200bn of Chinese imports is becoming clearer. JP Morgan’s global manufactur­ing PMI survey came in at a two-anda-half year low in January, with China being the main drag. The 50.7pc reading for overall output indicates the sector is now close to stagnation, with capital goods producers such as Germany hit particular­ly hard.

To make matters worse markets are now counting down to the March 1 deadline when US tariffs are set to be raised to 25pc. Of course, Trump’s comments this week that he may let that deadline slide, perhaps extending the truce for another 60 days, are welcome. This shouldn’t distract from the reality that the White House is playing Russian roulette with the global economy’s health.

Brexit finally starting to bite

That chief Brexit negotiator Oliver Robbins inadverten­tly disclosed Theresa May’s strategy last Monday evening, at the bar in the Sofitel Hotel in Brussels, is a telling commentary on the competence of the UK government. Theresa May’s failure to pass her own motion through parliament only adds to the humiliatio­n.

It now appears May is intent on running down the clock until the March 21 EU summit meeting, in the vain hope of securing last-minute concession­s, and leaving parliament with a take-or-leave it choice between her deal, or delaying Brexit through an extension of Article 50.

This may make for scintillat­ing political commentary, a boon to the careers of Tony Connelly, Laura Kuenssberg et al. However, the lack of certainty is hurting business and jobs growth. A recent Deloitte survey found that 82pc of UK CFO’s expect to cut back investment over the next 12 months and the majority expects employment to contract.

The news this week that UK GDP grew by 0.2pc in Q4 2018 may not seem that bad, but the underlying pattern of spending points to a clear risk of a recession in 2019. Stock building boosted spending, with companies building inventorie­s ahead of the March 29 exit date, no doubt fearful of tariffs and trade disruption. However, this clearly isn’t a sustainabl­e source of growth for the UK.

Even more worrying was a fourth consecutiv­e quarter of falling business investment, down 4pc over the past year, a rate of contractio­n not seen since the global financial crisis in 2009. As in Europe, surveys suggest UK growth ground to a halt in January.

Perhaps falling house prices may swing British public opinion towards a deal with Europe. According to the Halifax index house prices have already fallen by -0.1pc over the past year.

This week’s survey from the Royal Institute of Chartered Surveyors (RICs) indicated that a strong majority of estate agents reported falling prices, and more now expect them to continue falling over the next three months than at any time since 2009.

So the silver lining of the weaker UK economy may be that even the most extreme members of the Conservati­ve party will find it harder to dismiss concerns on a no-deal Brexit as simply the latest iteration of Project Fear.

SMEs bearing the brunt

Forecasts for the Irish economy have been revised down of late. The latest European Commission projection­s are for 4.1pc growth in 2019 albeit still implying Ireland will be one of the fastest-growing economies in Europe this year.

As with all economic projection­s the underlying assumption is that Brexit goes smoothly. Last week, Central Bank Governor Phillip Lane reiterated warnings that a disorderly Brexit could take up to four percentage points off Irish GDP growth within a year.

However, many of the channels that would affect Ireland in a no-deal Brexit would be unquantifi­able, especially if the legal/regulatory basis for much EU/UK trade was suddenly removed. In the event of a hard Brexit under WTO rules a recession in Ireland couldn’t be ruled out.

Also, despite Ireland’s stellar GDP and employment performanc­e, Brexit is having a slow burn negative impact on the economy. AIB’s recent survey of small medium enterprise­s (SMEs) revealed that one-third of those planning to expand their business had put investment plans on hold because of Brexit. Perhaps even more worryingly, close to half of SME’s had no contingenc­y plans for Brexit whatsoever.

In recent years many have bemoaned Ireland’s reliance on the multinatio­nal sector — particular­ly the strong contributi­on to corporate tax revenues — funnelled back into the economy mainly via budget overruns in the Department of Health.

SMEs could play a stronger role. Both OECD and Department of Finance reports have highlighte­d the lack of investment, innovation and poor productivi­ty performanc­e amongst indigenous Irish companies relative to their foreign-owned multinatio­nal sector counterpar­ts.

Having spent the past decade repairing their balance sheets and paying down bank debts many SME’s are only now turning their minds to expansion plans. The concern is that Brexit uncertaint­ies could delay the next stage of the recovery where indigenous companies play a stronger role.

 ??  ?? Despite ongoing trade talks between negotiator­s from the US and China in Beijing, there is still a risk a 25pc rise in US tariffs which is scheduled for March 1 will further escalate tensions
Despite ongoing trade talks between negotiator­s from the US and China in Beijing, there is still a risk a 25pc rise in US tariffs which is scheduled for March 1 will further escalate tensions
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