A world of dif­fer­ence

Belfast Telegraph - Business Telegraph - - Front Page - ECONOMYWATCH byjor­dan­buchanan, economis­tatul­steruni­ver­si­tye­co­nomicpol­i­cy­cen­tre @Ul­ster UNIEPC

It’s time to look at thechal­lenges fac­ingtheuk out­side­brexit

THE eco­nomic nar­ra­tive across the UK and North­ern Ire­land con­tin­ues to be dom­i­nated by on­go­ing Brexit un­cer­tainty as to what the fu­ture trad­ing re­la­tion­ship with the EU may look like.

Brexit, how­ever, is only one of the chal­lenges fac­ing the UK. Much po­lit­i­cal at­ten­tion has been de­voted to the ne­go­ti­a­tions and per­haps rightly so, but it is also im­por­tant to look out­side the Brexit lens and pay some at­ten­tion to the wider eco­nomic chal­lenges fac­ing ma­jor economies across the world.

The global econ­omy has per­formed rea­son­ably well in re­cent years, show­ing con­tin­ued ex­pan­sion since 2016, and the lat­est fore­cast from the In­ter­na­tional Mon­e­tary Fund (IMF) is for growth to con­tinue at sim­i­lar rates.

How­ever, down­side risks are in­creas­ing and the po­ten­tial for favourable sur­prises may be re­ced­ing. The global re­cov­ery, whilst re­main­ing fairly ro­bust has be­come less evenly bal­anced, and may have peaked in some ma­jor economies. The trend to­wards in­creased pro­tec­tion­ism poses the most im­me­di­ate threat to global growth, con­fi­dence, as­set prices and in­vest­ment.

Fur­ther­more, oil prices have in­creased by more than 50% in the last 12 months which has boosted the eco­nomic prospects of oil rich na­tions but has cre­ated in­fla­tion­ary pres­sures in ad­vanced economies.

USA: Eco­nomic growth is strong, pri­vate sec­tor con­fi­dence re­mains high and un­em­ploy­ment is at 50-year lows, driven by ro­bust con­sumer spend­ing and con­tin­ued fis­cal stim­u­lus through lower taxes.

A strong US econ­omy has sup­ported in­creased global trade on the back of stronger do­mes­tic de­mand. How­ever, mon­e­tary pol­icy is ex­pected to con­tinue to tighten in the com­ing year, on­go­ing trade dis­putes with China are mount­ing along­side an ag­ing work­force, and slow­ing pro­duc­tiv­ity growth may lower eco­nomic growth in the medium term.

The IMF fore­cast eco­nomic growth to av­er­age a healthy 2.4% per an­num from 2018-2020, be­fore fall­ing to a mod­est 1.5% per an­num from 2021-2023. Eu­ro­zone: The eco­nomic per­for­mance has been gen­er­ally pos­i­tive which has led the Euro­pean Cen­tral Bank to an­nounce an end to its quan­ti­ta­tive eas­ing pro­gramme at the end of this year, although main­tain­ing its com­mit­ment to low in­ter­est rates un­til the end of 2019.

Eco­nomic growth has slowed this year, par­tially due to es­ca­lat­ing global trade ten­sions and ris­ing oil prices, mak­ing net ex­ports neg­a­tively con­tribute to growth.

Sup­port was pro­vided by higher con­sump­tion and in­vest­ment as labour mar­kets im­proved along­side low costs of bor­row­ing.

The eu­ro­zone’s per­for­mance is heav­ily re­liant on growth in Ger­many, France and Italy, with each fac­ing their own chal­lenges: Ger­many: The econ­omy is per- form­ing well but faces a short­age of skilled work­ers, and growth has been re­vised down by the IMF to av­er­age 1.5% per an­num by 2023. France: The econ­omy is fac­ing a com­bi­na­tion of rel­a­tively higher un­em­ploy­ment, al­most no growth in liv­ing stan­dards in a decade (as mea­sured by GDP per head) and the pub­lic fi­nances are stretched with amongst the high­est spend­ing ra­tio in the G7. The IMF fore­cast growth av­er­ag­ing 1.6% per an­num by 2023. Italy: The new pop­ulist govern­ment has had its draft bud­get for spend­ing re­jected by the Euro­pean Com­mis­sion in Brus­sels in an un­prece­dented move and for the first time in the Eu­ro­zone’s his­tory. If the Ital­ian Govern­ment re­fuses and sticks to its cam­paign promises, it may face sanc­tions. How­ever, if the Euro­pean Com­mis­sion al­lows the Ital­ian govern­ment to side­step the fis­cal rules, it will un­der­mine the in­tegrity of the Eu­ro­zone and risk a back­lash from other EU lead­ers. The IMF fore­cast Italy’s eco­nomic growth of only 0.9% per an­num by 2023. UK and North­ern Ire­land: A stronger global econ­omy and com­pet­i­tive ster­ling ex­change rate helped sup­port UK ex­ports and in­bound tourism last year. In­deed, the UK econ­omy posted a rea­son­ably strong 1.8% growth, out­per­form­ing ex­pec­ta­tions.

How­ever, growth has slowed in the first half of this year with much of the poor per­for­mance be­ing at­trib­uted to a com­bi­na­tion of Brexit-in­duced un­cer­tainty and the poor weather con­di­tions.

De­spite a strong labour mar­ket, the econ­omy has ex­pe­ri­enced no sig­nif­i­cant pickup in liv­ing stan­dards and pro­duc­tiv­ity, wages are lower than 10 years pre­vi­ous and eco­nomic growth this decade is on course to av­er­age the worst decade for 80 years or the sec­ond worst in 200 years.

Brexit re­mains the most im­me­di­ate risk. It will be im­por­tant that a ben­e­fi­cial trad­ing ar­range­ment is ne­go­ti­ated, given an in­creas­ingly frag­ile global en­vi­ron­ment.

Fi­nally, and not to be over­looked, North­ern Ire­land’s struc­tural eco­nomic chal­lenges of high in­ac­tiv­ity and lower pro­duc­tiv­ity should be kept firmly on the radar. Brexit is a chal­lenge, but it is not the only one, lo­cally or na­tion­ally. Ad­di­tional com­men­tary by Dr Es­mond Birnie. In next week’s Econ­omy Watch, we hear from An­drew Webb of Baker Tilly Mooney Moore

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