Economic forecasting is a dangerous game at the best of times. But 2019 brings a particularly high level of uncertainty. There is Brexit. The possibility – now looking less likely – of higher mortgage rates. And fears over the world economy which are sending stockmarkets tanking. Here are the three key questions for the year, the vital signs to watch – and what they will mean for you.
1. Will there be a Brexit transition period? Or could a ‘no-deal’ actually be allowed to happen?
There was a merciful break in the Brexit news over Christmas, but it is going to be back in full force shortly. If there is one key Brexit thing to watch for 2019, it is whether the transition period comes into force when the UK leaves at the end of March. This is effectively a standstill which would mean not much would change for exports, jobs and the economy until the end of 2020 at least, and possibly until the end of 2022 if an extension were to be agreed. It would remove a huge cloud over the economy for this year.
For the transition period to come into effect, the two sides must have signed up to the withdrawal agreement, meaning Theresa May has to win support for it in the House of Commons. Reading commentary from UK, the diversity of views among leading commentators on how this will work out is striking. Some feel the agreement may eventually get support. Others feel this remains unlikely.
If there is no withdrawal agreement, this could lead to a no-deal Brexit, where the UK crashes out with no withdrawal agreement finalised. Alternatively, there is support for a second referendum, even though the political road to it remains complicated. Naturally, a reversal of the original Brexit decision would be a big economic relief to us.
If the UK does decide to hold a second referendum, it would have to ask the EU to extent the Article 50 process. All 27 other EU states would have to agree. If the result of a referendum was to remain, then the UK would – on the basis of a recent European Court of Justice decision – just have to notify the other EU members and would not need their approval to do so.
Such are the uncertainties of a no-deal, that many business people believe it could simply not be allowed happen and that some way will be found to avoid it. But if nothing can be agreed, then a no-deal is the default option – it is what happens unless something is sorted out to stop it.
A transition period would mean little immediate economic hit here, though there would still be longer-term uncertainty about what kind of trade deal between the EU and UK might eventually emerge.
Forecasting the no-deal impact on our economy is difficult. The worst hit would be in sectors that trade with the UK, particularly food where significant tariffs – or special import taxes – would immediately apply on trade both ways and where trade is particularly vulnerable to customs delays and controls.This means the worst hit regions would be in rural Ireland. Some engineering sectors and textiles , compromised mainly of SMEs, would also be particularly exposed. Recent work by the OECD estimates that food and agricultural exports to the UK could fall by 30 per cent – other studies have put the number higher – and that output in the sector could fall by 14 per cent.
Import prices would also rise, hitting consumers, with products such as cereals, biscuits, jams and confectionery set for rises of 20 per cent or more, enough to push the average price level across the economy up 2 to 3 per cent, according to an ESRI study.
Harder to forecast is the wider impact on consumer and business confidence,investment and thus on growth. A sterling drop could have a wider impact on the economy, for example, and the knock-on impact from businesses particularly hit could be significant.
All this uncertainty would be avoided if the transition period came into force. Right now, however, UK approval of the withdrawal agreement necessary to make this happen is very much in question.
2. Is the world economy heading for a downturn? And does this leave some of big players with huge Irish operations exposed?
Stockmarkets had a horrid December, meaning 2018 was the worst year in a decade for shares. The Irish market had one of the biggest losses, down 21 per cent on the year, hit by global sentiment and some specific factors. Now 2019 has started off nervously and Apple’s financial warning has neatly encapsulated the main themes – worries about global growth, fears about the impact of trade tensions and specific factors affecting some of the big tech players.
There are two theories for 2019 among analysts. One sees a kind of coordinated world economic fall in economic growth – a "synchronised slowdown", in the words of Megan Greene, chief economist at Manulife Asset Management. She points out that US growth is already slowing from a peak of over 4 per cent in the second quarter of last year, EU growth has slipped back well below 2 per cent and there are clear signs of a Chinese slowdown, notable again in manufacturing figures published this week.
The other theory is that things could be more volatile, driven in particular by fears of a US/China trade war. Following tit-for-tat tariffs imposed by both sides last year, a kind of a time-out was agreed and the US suspended the threat of a tariffs on a further $200 billion (€176 billion) of Chinese goods, pending agreement by March 1st on a way forward. The US has objected to some Chinese trading practices and particularly its treatment of intellectual property.
Whether this dispute is sorted, the talking continues, or it turns into a full-scale trade war will be one of the key markers of 2019. Were the US to impose tariffs on the bulk of Chinese imports, leading to certain Chinese retaliation, it would have a big impact on both economies. And remember that Donald Trump has threatened EU exporters, including car firms, with tariffs, too. Signs of progress in trade talks between the US and China have encoruaged markets in the last few days.
With the fall-off in Chinese growth attributed in part to Trump’s trade moves and fears of more to come, Apple’s warning shows the blowback from this on US exporters. The statement on Wednesday from Apple’s chief executive ,Tim Cook, said: “ As the climate of mounting uncertainty weighed on financial markets, the effects appeared to reach consumers as well, with traffic to our retail stores and our channel partners in China declining as the quarter progressed.”
Competition from local companies such as Huawei – and Apple's aggressive pricing strategy – are also factors. Beyond that, analysts warn that Apple also faces fundamental issues as demand for upgraded phones starts to fizzle out and competitors increasingly undercut its offerings.
The Apple warning, and the privacy concerns facing big companies such as Facebook, are particularly relevant given their significant employment here and the tax they pay. Apple's employs 6,000 in the Republic, for example. Work by the National Competitiveness Council (NCC) and the National Treasury Management Agency has highlighted Ireland's reliance on "big tech" for exports and tax.
Peter Clinch, the chairman of the NCC, pointed out last month that " a small fraction of firms provides the major part of Ireland's productivity performance, value added, exports, and corporate tax receipts, disguising the majority of under-performing firms, where productivity growth is stagnant or falling." Other economists argue that these headline figures can overstate the reliance of our underlying economic performance on these firms.
Nonetheless, nobody disputes that the economic fortunes of Apple, Google, Facebook and a few big pharma companies are matters of vital interest for Ireland. And many of these companies are now facing significant questions, while how they are taxed is also a matter of a big international debate.
3. Will interest rates start to go up ?
Until a few months ago, the expectation had been that the ECB would start increasing interest rates next Autumn, perhaps as early as September. Now, however, a series of weaker economic signals has changed the market view. At the moment, forward interest rates on the market suggest traders see only a 25 per cent chance of an ECB interest rate rise in 2019, and only a very gradual rise for 2020. However these expectations can change quickly and all eyes will be on the economic data in the weeks ahead, as investors try to understand what exactly has contributed to the growth slowdown, particularly in the key German manufacturing sector.
" We still can't rule out an increase in 2019," says Conall Mac Coillle, chief economist at Davy Stockbrokers, but the jury is very much out on it at the moment. The markets are trying to work out whether the euro slowdown is part of a global fall-off in growth , or to more specific factors which may work themselves out.
Expectations for further increases in US interest rates are also being rapidly revised. After a controversial US rate rise in December, markets are not now expecting any further rise in 2019, a huge turnaround from earlier predictions. So what the US Fed does is another key thing to watch. The rebound from the crisis and the need for central banks to withdraw the massive stimulus from rock bottom interest rates and injecting money into the system has left uncertainty in its wake.
The Republic, with a high level of government debt and also of household borrowing has benefited hugely from the era of zero official interest rates since the crash. Higher borrowing costs would affect both government and household finances – and those of higher debt businesses. We have seen from the US that once rates start to rise, then can move quickly. Whether Europe is now heading in this direction will be one of the vital indicators for 2019.
Ireland’s national debt has fallen as a percentage of GDP, but still stands at around €200 billion and the National Treasury Management Agency will continue to have to borrow to raise new funds to roll over maturing borrowings. Household debt has fallen from over €200 billion in 2008 to just over €140 billion, but at not far off €30,000 per head of population, it remains the fourth highest in Europe. For us, the cost of money is still a matter of vital national interest.
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