Eco­nomic alarm bells are clang­ing as we pre­pare to ring in 2019

The Irish Times - - Opinion & Analysis - Cliff Taylor

Fears of trade wars were put on the back­burner, as ev­ery­one tried to work out what was real and what was just noise on Planet Trump. Now the mood is switch­ing. In­vestors worry that the boost from the tax cuts will soon be over, leav­ing a hang­over for the US gov­ern­ment fi­nances

Maybe re­al­ity is fi­nally catch­ing up. Re­mem­ber those few months in 2016 when Don­ald Trump was elected pres­i­dent of the US and Bri­tain voted to leave the EU?

Both led to fore­casts that eco­nomic tur­moil would fol­low. But it didn’t hap­pen. The US econ­omy has surged for­ward and while the UK econ­omy has been hit, the im­pact has – to the de­light of the Brex­i­teers – been much less than an­tic­i­pated. So far.

Per­haps 2019 will be some­thing of a year of reck­on­ing. Let’s hope part of that is not due to a po­ten­tially chaotic no-deal Brexit, the likely cost of which none of us re­ally un­der­stands.

But there are other trends too which sug­gest that the ex­tra­or­di­nary ex­pan­sion in the world econ­omy since the end of the fi­nan­cial crash, driven in part by a splurge of cheap money from the world’s cen­tral banks, may fi­nally be run­ning out of steam. And this, of course, has im­pli­ca­tions for Ire­land.

You will have seen these fears in the fi­nan­cial mar­kets this week, par­tic­u­larly on Thurs­day when share prices took a nasty tum­ble. But the real ac­tion in re­cent weeks has not been in share mar­kets, but in the some­what com­plex world and low-pro­file part of the mar­kets where traders bet on where in­ter­na­tional in­ter­est rates are go­ing.

A cou­ple of months ago, in­vestors had put their money on a con­tin­ued steady rise in US base in­ter­est rates, which have al­ready in­creased eight times from their cri­sis level of just over zero to just above 2 per cent now.

In­vestors had, up to re­cently, ex­pected four fur­ther US in­ter­est rate rises be­fore the end of next year, the first com­ing this month. Now they ex­pect one, or at most two.

In Europe, mean­while, mar­ket ex­pec­ta­tions of a rate rise in Septem­ber of next year are now pushed back to De­cem­ber – or even 2020.

This is hap­pen­ing be­cause in­vestors worry that the US econ­omy may be start­ing to run out of steam, while Europe, af­ter a spurt in 2016, also shows signs of slow­ing.

Slower growth means a lower rate of in­fla­tion and so lower in­ter­est rates. And here we come back to Trump. For the first year and a half of his term, growth and the stock mar­kets were strong and his big tax cut in­tro­duced last year gave the econ­omy a boost. Fears of trade wars were put on the back­burner, as ev­ery­one tried to work out what was real and what was just noise on Planet Trump. Now the mood is switch­ing. In­vestors worry that the boost from the tax cuts will soon be over, leav­ing a hang­over for the US gov­ern­ment fi­nances.

And Trump’s talk on trade may be turn­ing into re­al­ity. The US and China have al­ready en­gaged in tit-for-tat tar­iffs – start­ing with Trump’s move on steel and alu­minium im­ports.


While a tem­po­rary three-month truce on fur­ther moves was agreed last week­end, no one is sure whether it will last. Ten­sions over the ar­rest of a se­nior Chi­nese ex­ec­u­tive from phone com­pany Huawei in Canada – on a US war­rant – will not help.

Tar­iffs are some­thing which have been off the front pages for years. Seen as an ar­cane way of pro­tect­ing home in­dus­tries by im­pos­ing a spe­cial tax on im­ports, they were grad­u­ally whit­tled away in in­ter­na­tional trade deals since the 1960s. Now they are back – one of the cho­sen weapons of eco­nomic na­tion­al­ism.

If the US/China row gets real, it will hurt growth in both coun­tries, all in the hope by the US pres­i­dent that it will get China to change some of its “un­fair” trade prac­tices. And don’t for­get that trade ten­sions re­main be­tween the EU and the US, too, with Trump con­tin­u­ing to is­sue threats about putting tar­iffs on car im­ports.

Dis­rup­tion to trade is also at the heart of fears over Brexit, of course, and par­tic­u­larly in a no-deal sce­nario when tar­iffs and bar­ri­ers to trade would go up overnight and there would po­ten­tially be short-term dis­rup­tion and chaos at ports. Here again there are signs that the re­al­ity of what this might mean is fi­nally start­ing to seep into the po­lit­i­cal and pub­lic con­scious­ness.

The prob­lem with a no-deal de­par­ture is that it would lead to a lot of the costs of a hard Brexit hit­ting in a short pe­riod of time, due to sig­nif­i­cant un­cer­tainty and up­heaval to trade and, in­deed, to pol­i­tics. Events in West­min­ster over the next week may pro­vide some point­ers, but no de­fin­i­tive an­swer.

The mes­sage from the mar­kets this week is that the risks from Trump’s trade pol­icy and from Brexit just add to con­cerns that growth may be slow­ing any­way. For Ire­land this need not nec­es­sar­ily be cat­a­strophic, but it will slow growth in our ex­port mar­kets – and in the econ­omy over­all. We should be able to weather a grad­ual slow­ing in world growth, though a full-blown trade war or a no-deal Brexit would be an­other mat­ter.

So we en­ter 2019 fac­ing a much higher level of un­cer­tainty than nor­mal. This is why all the of­fi­cial bod­ies – the Fis­cal Ad­vi­sory Coun­cil, the Cen­tral Bank, the Eco­nomic and So­cial Re­search In­sti­tute and so on – are sound­ing alarm bells.

Of­ten things mud­dle along and the worst does not hap­pen. But we do need to recog­nise that the pos­si­bil­i­ties for 2019 are un­usu­ally wide, rang­ing from a grad­ual in­ter­na­tional slow­down to some­thing a good deal more rocky. And that the free in­ter­na­tional trade en­vi­ron­ment on which our eco­nomic model de­pends is now un­der some threat.

What is for sure is that the ex­traor­di­nar­ily favourable pe­riod of in­ter­na­tional growth which has greatly helped our econ­omy to bounce back from the cri­sis is now – one way or an­other – com­ing to an end. Whether Trump or Brexit add fur­ther spice to the slow­down is the big un­cer­tainty of 2019.

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