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.