THIS ARTICLE APPEARED IN IRISH EXAMINER JULY 20th 2018
The world of geo-politics is in a state of chassis, with each day bringing fresh challenges to the global order. The antics of President Trump in relation to what are traditionally the two strongest allies of the US in Europe – the UK and Germany – and his cosying up to Putin have been truly bizarre and quite disturbing. Not surprisingly and perhaps somewhat reassuringly, the reaction from some of his Republican colleagues has been quite strong. At the same time, the move towards protectionism is continuing apace, and the Brexit process lurches from one crisis to another. Amidst all of this chaos, financial markets remain pretty unperturbed, with both currency and equity markets displaying an amazing level of resilience. We are indeed living in very strange times.
From a market perspective, the key point is that to date the global economic momentum is bearing up very well and is generally showing very few real signs of stress. However, this could easily change. The latest update to the International Monetary Fund’s (IMF’s) World Economic Outlook published this week concludes that the global economic momentum is still quite strong, but it suggests that the risk of worse outcomes has increased. It points to slower growth in the Euro Zone, Japan and the UK, but also points out that the US is still growing strongly. It identifies rising US interest rates and a consequential stronger dollar, and growing trade tensions as the main threats to the global expansion. However, it is the latter factor that the IMF is most concerned about. A further escalation of global trade tensions would damage confidence, asset prices and investment and is viewed as the greatest near-term threat to global growth. Interestingly, it highlights the fundamental political challenges regarding migration policy as a big longer-term issue for the EU.
Growth in the UK is projected to be well below the EU average this year and next. No surprises there, given the farcical evolution of the Brexit process. The White Paper published last week certainly gave some reassurance that Theresa May is intent on pressing ahead with her preferred soft form of Brexit. However, subsequent events seem to have removed much of the ground from beneath the White paper, and particularly the parliamentary decision on the so-called ‘backstop’ agreement relating to Northern Ireland on Monday.
With agreement on Brexit due by October and with March 29th 2019 rapidly approaching, it becomes less and less obvious how an incredibly weakened Theresa May and a belligerent EU can possibly reach agreement on what is currently on the table. The Prime Minister will struggle to deliver what she desires and the EU will struggle to agree to what she desires, not to mention the alterations that are being foisted on the Prime Minister by a Tory party that is in the midst of an unedifying civil war. The whole situation is totally barmy and it would be funny, if the stakes were not so high.
The impact of Brexit-related uncertainty is impacting on the Irish economy in a number of ways. Sterling weakness continues to drive double-digit growth in used car imports from the UK and this is causing new car sales to continue to decline. The first almost seven months of 2018 is just a repeat of what happened in the motor industry in 2017.
On the trade front, Ireland continues to generate a strong surplus in merchandise trade, but some of the trends therein are of concern. In the first five months of the year, total merchandise exports were 7.1 per cent ahead of the same period last year, with exports to the US increasing by 7.4 per cent and to the Euro Zone by 11.6 per cent. However, exports to Great Britain are down by 8.4 per cent and to the UK as a whole, they are down by 7.2 per cent. Exports of Food and Live Animals to Great Britain increased by 3.4 per cent, but exports of Chemicals and Related products were down by 19.2 per cent. It is reassuring that the food performance is holding up well despite the ongoing weakness of sterling, but the performance of the Chemical sector may be reflecting supply chain changes ahead of Brexit. Only time will tell. Overall, the Irish trade story is very strong, but the dark shadow of Brexit is getting darker by the day. The world is getting curiouser and curiouser!