EU TRADE POLICY AT VARIANCE WITH TRUMP AND BREXITEERS

THIS ARTICLE APPEARED IN THE IRISH EXAMINER JULY 12th 2019

One of the dominant themes in global politics over the past couple of years has been a growing sense of nationalism and a move towards isolationist economic policies. Nowhere has this trend been more obvious than in the UK decision to walk away from its free trade relationship with an EU market of 440 million people and the world’s third most populous area after China and India, and the election success and subsequent antics of Donald Trump. A key part of Trump’s pre-election appeal was his assertion that free trade deals have cost US jobs and are not good for the US economy. He promised to re-negotiate the then titled North American Free Trade Agreement (NAFTA), which he has done, and also to pressurize the Chinese on the trade front, which he is also doing. While the Chinese situation is ongoing and is justifiably a source of deep concern, he is now starting to up the ante with the EU.

In marked contrast to these UK and US behaviours, the EU is continuing to plough ahead with the negotiation of trade deals. Japan and Canada are some of the most significant ones agreed by the EU in recent times, but the deal agreed with the four founding member countries of the Common Market of the South, also known as Mercosur – Brazil, Argentina, Uruguay and Paraguay – is proving very controversial and will undoubtedly face many hurdles before it eventually sees the light of day.

The EU already has trade deals with most of the other countries in Latin America, so this is arguably a natural progression for free-trade driven EU. The four Mercosur countries offer a market of 260 million people and the EU already exports €45 billion of goods and €23 billion in services to the four. However, there are significant barriers to trade in the shape of high import duties, burdensome procedures and different technical and regulatory standards. The removal of these could have a very marked impact on trade flows.

Under the Mercosur deal, the EU is allegedly insisting that it will not undermine EU food safety and animal and plant health legislation; that it will protect the rights of the EU to regulate food safety, including genetically modified organisms (GMOs); and the ability of the EU to set maximum levels of residues for pesticides, veterinary medicines and contaminants. In a nutshell, the EU side is arguing that EU rules will apply to all products sold in the EU and that the EU will retain its right to regulate food safety in the interests of EU citizens health. It is also argued that the EU and Mercosur will commit to implementing the United Nations Framework Convention on Climate Change and the Paris agreement on climate change.

The reaction to Mercosur has been generally positive from those who believe in the virtues and benefits of free trade, but the beef sector in the EU in general and Ireland in particular are not buying this and have thus far reacted in a very negative way. The EU side is arguing that it is protecting sensitive agricultural sectors by setting quantitative limits on the importation of products such as pork, beef, ethanol, honey, sugar and poultry. For example, beef imports are being limited to 99,000 tonnes, but there is a total lack of clarity about where the various beef cuts such as steak fit in to these overall limits. This is an important issue for Irish beef farmers who are currently facing a perfect storm from issues such as consumer behavior, over supply of beef produced from the dairy herd, environmental issues around beef production, reduced payments from the EU CAP budget, and intense competition from much cheaper meat products such as chicken and pork. Of course overriding all of this is that big elephant in the beef shed, Brexit.

Beef representatives are arguing with some justification that they are forced to adhere to very expensive and very stringent environmental standards, and are now being faced with unjustified competition from beef producers who currently operate under very lax environmental standards, to put it mildly.

Mercosur is far from a done deal and we can be certain that various lobby groups will become very vocal and possibly militant and at a political level, the just-agreed trade deal has many high hurdles to overcome. Meanwhile outside of the EU, other big trading blocks will continue to push the protectionist agenda.

 

THIS ARTICLE APPEARED IN IRISH EXAMINER JULY 5th 2019

GOOD FIRST HALF, BREXIT LIKELY TO DOMINATE SECOND HALF
By Jim Power
As we move into the second half of the year, it is possible to look back on the first six months with a certain degree of positivity. On the whole, the Irish economy continued to make progress and thankfully the relatively negative prognostications for the global economy at the beginning of the year have not really materialized. The global economy has actually maintained a pretty stable state; albeit that state is somewhat softer than policy makers or indeed we here in the small open Irish economy would aspire to and hope for.

Based on the statistical evidence we have to date, the Irish economy is likely to be experiencing real annual growth, not the distorted version, of around 3.5 per cent at the moment. Within this there are some very positive trends, but equally we are starting to see some warning signs that should be taken quite seriously.

On the positive side, the export sector continues to be the stand out performer and issues such as Brexit are not having much of a visible impact, while the Exchequer finances are still showing quite a degree of economic buoyancy.

In the first four months of the year merchandise exports were 12.7 per cent ahead of the same period a year earlier. Exports to the EU, which accounted for 49 per cent of the total, expanded by 11.4 per cent. Within that, sales to the UK expanded by 9.3 per cent, but the UK in total accounted for just 10.8 per cent of our total export sales. I suspect this is the lowest market share in our history, but of course for the indigenous export sector the exposure to the UK is still dangerously high. Almost 36 per cent of exports of food and live animals were sold into Great Britain. This is the real area of concern in the context of Brexit.

Consumer spending on goods, as captured by the monthly retail sales series, increased by just 2.9 per cent in volume terms and by 2.1 per cent in value terms in the first five months of the year. Within this, new car registrations declined by 7.4 per cent in the first six months, with used imports increasing by another 2.4 per cent. Anecdotally and statistically, it is clear that for consumer facing businesses, it remains quite a challenging environment and margin pressures remain the order of the day.

On a somewhat cautionary note, and I stress the term somewhat cautionary, tourism is starting to show some strains and manufacturing activity is under some pressure.

While overall overseas visitors to the country increased by 3.7 per cent in the first five months of the year, there was a year-on-year decline of 0.4 per cent in May, with the UK market down by 4.4 per cent. This is not a situation of crisis by any stretch of the imagination, but it does highlight the cost competitiveness of the Irish tourism product and does in my view cast some doubt on the decision to increase the VAT rate in Budget 2019.

On the manufacturing side, the monthly index of manufacturing activity as measured by AIB Bank, fell marginally below 50 in June, which is an indicator of contraction. Not surprisingly, Brexit is the key factor here.

The unemployed total increased by 300 in June and the unemployment rate remained unchanged at 4.5 per cent. This is no cause for concern in an economy approaching full employment, but it does probably suggest some employer caution as the Brexit clouds continue to darken. Having said that, the labour market has come so far, so fast, the downward momentum was always likely to be arrested at some point.

On the Exchequer finance front, the returns for the first six months of the year show that although total tax revenues are running a modest €128 million behind target, they are still €1.7 billion ahead of last year. There is no greater indicator of what is happening in an economy than tax revenues; after all we tax everything that moves in this country.

So all in all, the report card for the first half of the year is a positive one, but the looming Brexit deadline of October 31st is hanging over Ireland like the Sword of Damocles. Interestingly, a UK group called the Alternative Arrangements Commission is about to publish a report called Alternative Arrangements for the Irish Border, which although very technical and complicated in nature, does suggest some interesting ways of getting the Irish government out of its backstop bind. Watch this space.

Sport Horse Industry in Ireland

In 2018, I produced a report assessing the economic contribution of the Sport Horse Industry in Ireland.

Read the article.

THIS ARTICLE APPEARED IN IRISH EXAMINER JUNE 21st 2019

GLOBAL THREATS TO FREE TRADE

The latest international trade data for Ireland confirm once again that the export sector of the economy remains a very important engine of overall economic growth and it is blatantly obvious that the future health of the export sector is crucial for the overall health and prosperity of the economy. Ireland is first and foremost a textbook example of a very small and very open economy and policy makers as well as the public should never forget this very important fact.

In the first four months of the year, merchandise exports were 12.7 per cent higher than the equivalent period in 2018. In the context of Brexit-related difficulties and the grey clouds that are currently hovering in international economic skies, this is a very impressive and very re-assuring performance. Overall exports to the EU, which accounted for just over 49 per cent of total exports, increased by 11.4 per cent. Within the EU, export sales to the UK increased by 9.3 per cent and the UK accounted for 10.8 per cent of total exports, which is the lowest market share for the UK in our history. Of course, the overall export numbers are distorted by the contribution of multi-national companies, particularly Pharma, and indigenous Irish exporters are still disproportionately dependent on the UK market. Just less than 36 per cent of exports of food and live animals were destined for the Great Britain market in the first third of the year. Therein lies the Brexit challenge.  

It is worth noting that although exports from the multi-national components of the economy do dominate and do distort the real meaning of the aggregate export data, overall exports of food and live animals did grow by 4.8 per cent in the first four months of the year. This sector is doing well in a challenging environment.

As mentioned earlier, the significance of this export performance and the overall contribution made by the export sector should not be lost on policy makers or the public. It is essential that policy remains firmly focused on ensuring that the sector remains as flexible and competitive as possible in the face of the gathering challenges.

We obviously have no idea at this stage what Ireland’s trading relationship with the UK will look like after October 31st next. However, one would have to have deep concerns about the apparently growing risk of a disorderly Brexit, which would have profound implications for the indigenous exporting sector in particular.

The clear slowdown in global economic activity is also a cause for concern. Central bankers are making heavy reference to these risks at the moment. The European Central Bank (ECB) stands ready once again to do whatever it takes to prevent a sharper slowdown in the Euro Zone economy. It cannot really cut the key official interest rates any further, but the provision of increased liquidity to the financial system remains a distinct possibility. In the US, the Federal Reserve appears to be somewhat willing to start easing interest rates again.

The fact that key central bankers are starting to show signs of behaving in this manner sends a clear message that they are and that we should be concerned about the current health of the global economy. Therein lies another threat to Ireland’s export sector.

Underlying all of these concerns is the fact that President Trump and the Chinese appear intent on ramping up their trade dispute and the threat of further escalation is now a very real one. It is estimated that the tariff measures implemented to date could knock up to 0.5 per cent off global growth this year, and with further escalation, the threat to global growth in 2020 looks potentially more serious.

The dispute between the US and China is no longer just about the trade imbalance between the two countries, and is now drawing in issues such as technology, industrial strategy and currency manipulation. It is difficult to see the logic driving Trump’s strategy, as US consumers look set to become the real losers from his tariff strategy. However, Trump recognizes that if he is to get re-elected, which appears a high probability at this early juncture in the electoral cycle, he cannot risk the current very real downturn in the fortunes of the manufacturing sector turning into something more serious. He obviously believes that increased protectionism will help address the problem.

More fundamentally, the current trend towards protectionism poses an existential threat to the globalization phenomenon that has been broadly positive for the overall global economy over the past three decades, and particularly so for Ireland. 

HOW MUCH LONG-TERM DAMAGE WILL BE DONE TO REPUTATION OF UK?

THIS ARTICLE APPEARED IN IRISH EXAMINER FEB 22nd 2019

As the Irish Government puts together legislation to deal with the potential fallout from a ‘no deal’ Brexit, the situation in the UK becomes more farcical by the day. Donald Tusk made a fair point a few weeks back when he queried as to what part of hell is reserved for the Brexiteers who ploughed ahead without any plan or notion as to how the UK might disentangle itself from a legal and economic arrangement that has prevailed since 1973. The notion that the UK could exit easily and painlessly was always ridiculous, but those who voted for and pushed Brexit had as much understanding of how the world works as a catholic priest has about marriage.

It is becoming more apparent by the day that the toll being taken and that will be taken on the UK economy could be quite serious. Nissan, Toyota, BMW and Ford have already made significant announcements about how a ‘no deal’ Brexit will impact on their activities in the UK. This week Honda announced that it was ceasing manufacturing in Swindon by 2022, with the loss of 3,500 jobs. While Honda has made it clear that this decision was not motivated by Brexit, the truth is that when decisions are being taken about where to locate mobile manufacturing investment, why would one want to invest in a country that is walking away from free access to a market of 500 million people and a trading block that has and is continuing to negotiate trade deals with many other third countries. Furthermore, the farcical nature and behavior of UK politics over the past three years would not exactly entice investment in the jurisdiction. The future of car manufacturing in the UK is now under serious threat.

Over the past couple of years I have generally believed that the UK would eventually do a deal with the EU and that at that stage, the UK economy would rebound strongly as the paralysis caused to business investment and consumer behavior by the intense uncertainty would dissipate. However, with just thirty-five days to go to the exit date, we are no nearer a resolution and the damage being inflicted is becoming more permanent in nature.

It is hard to know what Theresa May’s strategy is or indeed if she has one at all. Perhaps she will take it to the wire and then present Parliament with a choice between her Withdrawal agreement and a hard Brexit. If that is her strategy, then it is a very risky one that could backfire very badly. The resignation of the seven Labour MPs from that dysfunctional party due to a combination of anti-Semitism and the party’s handling of Brexit is too little too late. The dysfunctional leadership of Jeremy Corbyn has been very obvious over the past couple of years, and he has always been strongly anti-EU. Why it took those seven until now to stand up and walk away from the party is anybody’s guess. More bizarrely, Corbyn has just re-admitted that radical left firebrand from my youth, Derek Hatton, to the party. Then three brave Tories jumped ship to follow the Labour renegades. One could not make it up, but it does not bode well for the UK and its reputation.

Only a fool or a charlatan could claim wisdom on what happens next, but the long-term damage to the UK economy and more particularly its reputation as a place in which to live, work, invest and do business, remains to be seen.

From Ireland’s perspective, the shenanigans across the Irish Sea, makes us look positively sane and sensible at this juncture. In a few weeks, Ireland looks set to become the only English speaking country in the EU (Malta aside); Cork will be the second largest English speaking city in the EU and Waterford will be the fifth largest. That surely will mean something positive for us?

Last week, the Central Statistics Office (CSO) published merchandise trade data for the full year, and it makes for pleasant reading. Overall merchandise exports expanded by 14.8 per cent, with sales to the Euro Zone expanding by 20.5 per cent, and the region accounted for 35.8 per cent of our total exports. Mind you, the increase of 38 percent in exports to Belgium does show how exports of pharmaceutical produces through that country distort the picture. Exports to the UK declined by 2.2 per cent, and the UK’s market share for Irish exports declined to 11.4 per cent. However, for food and live animal exports, the UK still accounted for 36.8 per cent of total export sales from the sector. Therein lies the challenge, particularly given the comments by Michael Gove this week in relation to the imposition of tariffs on agri-food imports in to the UK in the event of a no-deal Brexit.

WAGE PRESSURES TO BUILD AS HARD BREXIT RISKS WANE

THIS ARTICLE APPEARED IN IRISH EXAMINER MARCH 1st 2019

After another eventful week in the UK it now appears possible that we are moving gradually towards some semblance of a soft deal on the Brexit front, or at least the prospect of a cliff-edge Brexit is possibly waning. March 13th will be a big day in that regard, but we can probably now afford to possess some sense of optimism than for some time. Of course such is the balminess of the UK political system at the moment, there is still potential for a shock, but the risks are declining due to the fact that some sane politicians who are committed to the greater good of the UK than their own selfish interests are at last starting to exert some muscle. It took a while, but better late than never. However, it would be naïve to under-estimate the skullduggery of the Brexiteers.

Hopefully, the avoidance of a hard-Brexit will give a significant boost to sterling and indeed to the UK economy. Both of those outcomes would be good news for the Irish economy and particularly for the very important agri-food and tourism components of the indigenous economy. Hopefully, not too much longer-term damage has been done to the UK economy by the lunacy that has characterized the country since June 2016. Some manufacturing activity will have been permanently lost, but hopefully other sectors will compensate. We need to be clear that a strong UK economy and a strong currency are undoubtedly in the best interests of the Irish economy.

The Irish labour market in general would benefit further from a stronger UK economy and from the boost to Irish exports that would result from a stronger UK currency, on both the services and the goods side of the export sector. Such a boost to a labour market that is already performing very strongly could be a double edge sword in the sense that it would serve to exacerbate the likelihood of labour shortages and retention and recruitment difficulties in both the public and private sectors of the economy. However, this would still be a better outcome than the employment shock that would definitely result from the UK crashing out of the EU without a deal.

The latest labour market data relating to the final quarter of 2018 shows that employment increased by 50,500 or 2.3 per cent in the year to December to reach 2.28 million, which is the highest level of employment ever recorded in the Irish economy. The annual growth rate did slow from a rate of 3 per cent in the previous quarter and 3.1 per cent a year earlier, but rather than interpreting anything negative, this probably reflects a combination of Brexit induced caution and recruitment difficulties in a labour market that is definitely tightening.

Following the crash in 2008, few believed that the Irish labour market would rebound in the manner that it has. 2012 was the low point of the employment market, and in the six-year period to the final quarter of 2018, overall employment has increased by 387,700 or 20.5 per cent. Over the six-year period all sectors, with the exception of agriculture, recorded growth in employment. The construction sector leads the way with an increase of 58,900, and the accommodation and food services sector came a close second, with an increase of 52,000. The total at work in agriculture declined by 2,900, which is indicative of difficulty recruiting, difficult trading conditions for some components of the sector, particularly beef, and the automation of farming in general, but the dairy sector in particular. All in all it is a positive labour market story, but one that will undoubtedly present its own challenges over the next couple of years as wages rise and recruitment and retention challenges start to become more acute.

At the annual conference of central bankers in Jackson Hole Wyoming last August, the main theme was the failure of virtual full employment in the US to translate into wage pressures. According to the minutes of the last meeting of the European Central Bank, a similar theme was explored in relation to the Euro Zone. The breakdown in the transmission of employment growth into wage growth is puzzling central bankers. Interestingly, in Ireland the latest data show that average weekly earnings increased by 4.1 per cent in the year to the final quarter of 2018. Wage pressures are starting to build here and a soft-Brexit will likely exacerbate those pressures.

AN ASSESSMENT OF THE ONLINE GAMBLING MARKET IN IRELAND AND ITS IMPACT ON GOOD CAUSES FUNDING BY THE NATIONAL LOTTERY

I recently completed a report on the online gambling market in Ireland to investigate claims by PLI that online gambling companies pose a threat to the funding of good causes by the National Lottery. PLI has described those companies as ‘parasites that should not be allowed offer odds on the lottery numbers. For a full copy of the report please click here.

 

TIME TO REALLY BREXIT-PROOF IRELAND BY MAINTAINING 9% VAT RATE

THIS ARTICLE APPEARED IN THE IRISH EXAMINER OCT 5th 2018

On Tuesday next the Minister for Finance Paschal Donohoe will present his third and very possibly the last budget of the current administration. He has been lucky in the sense that the budgets over which he has presided have been prepared against a positive domestic economic backdrop and the global economy has been behaving itself. As a consequence, he did not have to make the difficult choices faced by his predecessors and really only had to decide where to apportion his largesse. However, the stakes are now rising, as the farcical evolution of the Brexit process in the UK promises to do serious damage to important sectors of the Irish economy.
Some of what we have been treated to over the past few days in relation to Brexit should worry us. Arlene Foster’s bizarre comments about the Good Friday Agreement should worry everybody on this island, and particularly those who make their living around the Border region. The stance being taken by Boris is even more bizarre and with every day that passes, the possibility of a very dangerous Brexit outcome is becoming more real.
Paschal Donohoe needs to ‘Brexit proof’ those parts of the economy and those regions that are most vulnerable. Increasing the VAT rate for the hospitality sector would be pure and utter folly and would not take account of business conditions and employment in rural Ireland and the risks they face from Brexit. Between the second quarter of 2011 and the second quarter of 2018, employment in the Accommodation and Food Services sector has increased by 60,400 and the sector now employs 177,100 people, many of whom live in rural Ireland, and particular in the very vulnerable Border counties. To increase the VAT rate for a sector that is so vital to the competitiveness of the Irish tourism product does not make sense. Furthermore, to increase the VAT rate on newspapers would just be another nail in the media coffin.
Michael Noonan and the late great Brian Lenihan have left a strong legacy from their periods in Merrion Street. Whether one agrees or disagrees with the policies they pursued, it is a fact that they presided over the most difficult set of circumstances in modern Irish history and incredibly difficult decisions had to be taken. It is also a fact that the Irish economy today is in the best place for over a decade, and both men should take at least some credit for that. There are obviously many more problems to overcome, but at least we are moving firmly in the right direction.
It remains to be seen what the legacy of Paschal Donohoe will be, but I strongly suspect that it will be a positive one, that is unless he is tripped up by Brexit. I am sure his budget speech next week will contain at least one reference to ‘Brexit proofing’ the Irish economy, and if it doesn’t, then it certainly should. Brexit potentially represents the most significant challenge faced by many sectors of the Irish economy since the crash, and we need to ensure that in the event of a bad outcome, the economy will be as resilient as possible.
Maintaining the special VAT rate at 9 per cent in a sector of the economy that has been so successful in delivering jobs, and one which is now facing immense challenges from Brexit, would make a very positive statement about a real conviction to ‘Brexit proof’ the economy. Any increase in this VAT rate would not be good for the profitability and employment in the hospitality or newspaper sector and would just serve to exacerbate the challenges posed by Brexit. The special VAT rate is a key element of the competitiveness of the Irish tourism sector and should not be sacrificed to trade unions and other interests who seem to have a significant problem with a sector of the economy that supports so many jobs and which is integral to the health and wellbeing of rural Ireland. Of course, an increase in the VAT rate would in the near-term help the public sector unions in their push to increase the public sector pay bill. Please Minister, do the right thing on Tuesday!

INSTITUTIONAL FAILURES ARE RIFE

THIS ARTICLE APPEARED IN IRISH EXAMINER OCTOBER 26th 2018

In the overall scheme of things, Ireland is a tiny country with a population of just 4.7 million people, albeit a population that is rising strongly. As a country we do many things well, such as attracting foreign direct investment, providing a decent enough education to our children, and we are pretty good at tourism as demonstrated by the fact that this year is likely to see another record number of overseas visitors coming into the country. We have also produced some world-class companies such as CRH, Smurfit Kappa, Glanbia and Ryanair. In recent days the Taoiseach boasted/joked that Ireland would be able to help out the UK after Brexit. I hope he was joking, because the one thing we cannot afford to be in this country is arrogant. We have way too many institutional failures to even contemplate arrogance.
On the debit side of the balance sheet, there are a lot of issues that we seem incapable of dealing with.
In terms of minding our environment and meeting our international environmental obligations, the country just does not cut the muster and unfortunately is languishing towards the bottom of the EU league table. Ireland will go nowhere close to achieving its Carbon emission targets and we will then be exposed to potentially very significant EU fines, or at least I hope that is what will happen, given our abject failure and unwillingness to tackle the issue in a meaningful way. The total failure to address the issue in the recent extremely populist budget, is proof positive of this fact.
This week the Environmental Protection Agency (EPA) reported that 38 towns and villages across the State are discharging raw sewage into the environment, and 28 large towns and cities are discharging inadequately treated sewage into the environment. Is this acceptable in a supposed first-world economy? I think not.
The ongoing failure to provide a broadband service remotely approaching acceptable standards across many parts of the country is also a total joke, but unfortunately one that has serious consequences for regional businesses across the country. The recent political controversy over this issue is just the latest instalment in what has been a tale of woe and gross ineptitude stretching back over many years.
The housing situation is another very significant debit entry on the national balance sheet. Having built thousands of houses in the run up to the crash, unfortunately many of which were in the wrong locations, we then virtually stopped building for a number of years, despite the fact that natural population growth was never likely to die away. We now have a serious crisis in supplying owner-occupied and rental housing and it is starting to do significant damage to the economy and its competitiveness. Earlier this week we were treated to a story about thousands of local authority properties lying idle and unoccupied. This is totally unacceptable. The responsible local authorities need to ensure that such houses turn over and are occupied within a matter of weeks. Perhaps that is too much to ask for, but I remain to be convinced.
On the health side, there is also a litany of failure. Hospital waiting lists are at unacceptably high levels, people are dying waiting for treatments, the primary healthcare system is creaking at the edges and is set to get much worse as the supply of GPs dwindles, and important regional cities such as Waterford cannot provide cardiac care at weekends. I could go on, but it is clear that despite all of the money we throw at the health service, the ability, or lack of it, to deliver an acceptable service is quite depressing. If we cannot deliver an adequate service at the moment, one shudders to think about what it will be like over the coming years as the population ages at a significant pace.
Predictably, some will argue that we simply do not spend enough money in addressing these issues, but there would appear to be little correlation between money expended and improved public services.
On cannot but jump to the conclusion that our institutional structures are all wrong and are not fit for purpose, and that our political system and our political elites are letting us down very badly. Instead of being arrogant about what we achieve, we should recognise and address that which we appear incapable of achieving.