After 2016, economic forecasting for 2017 has got to be perilous
Business review of 2016: Challenges for next year include Trump’s election, Brexit, euro zone issues and the threat of election-related upheavals in Europe
The housing crisis has emerged as a key issue. High rents and the lack of availability of new homes is emerging as a block to inward investment and to the State’s attempts to attract banks from London to Ireland post-Brexit.
In terms of surprises, 2017 is unlikely to rival the year just ending. From the Brexit vote to the Apple tax decision and the election of Donald Trump, it is no exaggeration to say the events of 2016 posed fundamental questions about Ireland’s economic model and raised big uncertainties for the future.
The plus side is that we head into the new year with the economy still growing at a healthy pace, outperforming most other developed economies. Forecasts for 2017 generally see Irish GDP growth of 3 per cent plus, slower than recent years, but still healthy.
Yet against the backdrop of the events of 2016, forecasting for 2017 looks particularly perilous – looking further ahead than that is practically pointless.
In practical terms, 2017 will give us the first indications of what dealing with the fallout from 2016 might look like. Theresa May is due to trigger formal talks on Britain leaving the EU in spring, and Donald Trump’s first 100 days in office will tell a lot. Financial markets have taken a remarkably relaxed view of both events so far. The initial sterling fall after the Brexit vote has partly unwound, and US financial markets have taken an upbeat view of what they believe will be a “pro-business” presidency.
There are predictions that the talks between Britain and the EU covering the terms of exit, the striking of new trade arrangements – and what happens in the transition after Britain leaves but before the new trade deal is struck – might not all be completed for another seven or eight years, or even longer.
Likewise, Trump will start the long process of policy negotiation and implementation, and we wait to see where the rhetoric of his election campaign will meet the reality of what will actually happen.
All the indications are that some of his early moves will be ones directly relevant to us – notably a big cut in the US corporation tax rate and other measures to try to “ keep jobs at home” and discourage multinationals from investing overseas.
Trump’s early moves on trade – where he has a significant ability to act without getting Congressional approval – will also bear close watching.
There is little point trying to predict the market reaction to these events, or calibrate their wider economic impact with any precision. In terms of the markets, suffice to say that on both sides of the Atlantic, and particularly in the US, they have taken a rosy view of the new presidency which is certainly vulnerable to disappointment.
And as for Brexit, there is a feeling that such is the complexity of the whole exercise that it is really difficult to get to grips with how it will all play out. Our exposure to UK media may have left us unduly influenced by the comments of May’s government that Brexit will be made to suit Britain. The view on the other side of the channel is different.
The idea of a “soft” Brexit – in which Britain stays in the single market and there is minimal disruption – is, for the moment anyway, off the table. Former Finnish prime minister Alexander Stubb, involved with Brussels for many years, wrote in the Financial Times this month that he had visited London and other European capitals to talk about Brexit and “the more I learn, the more worried I am”.
For Ireland, the coincidence of Brexit and Trump changes the rules in two of the three big influences on our economic model. Britain is our biggest single export market, and a key market for job-heavy Irish-owned firms in sectors such as food. The US is by far our biggest source of foreign direct investment, and also a key export market.
And in the third big sphere of influence on us – the EU – doubts remains about the growth outlook, while the Apple judgment and other tax moves underline another challenge to our economic model. That the European Commission ruled against Ireland in the Apple case came as no surprise. But Dublin was taken completely by surprise by the scale of the judgment – a massive €13 billion.
Whether the logic of the ruling made by the commission’s competition directorate will stand up in the European courts remains to be seen. But there can be no doubting the hit to Ireland’s reputation, notwithstanding the protestations from the Government and the accounting community here.
There are also wider European questions and, if 2017 is to bring new upheavals, they may well emanate from here.
The Italian No vote in its constitutional referendum has led to significant political uncertainty and concern in Brussels that the anti-euro Five Star Party could at some stage hold the reins of power.
Meantime, Marine le Pen is running strongly in the French presidential election, while Germany and the Netherlands also face elections.
Could this make 2017 a defining year for the euro? Or will the EU, yet again, find a way to muddle through?
Put against the backdrop of these uncertainties, the recent forecast from the Economic and Social Research Institute (ESRI) that annual economic growth here could continue at 3 per cent plus for the foreseeable future is surrounded by more than the usual level of uncertainty.
The ESRI itself tried to put some numbers on this, looking, for example, at the likely impact on economic growth of different Brexit scenarios and the possible impact on foreign direct investment (FDI) and our corporate tax flows on changes to the EU corporate tax regime.
Both are – not surprisingly – seen as negative, but such are the range of scenarios involved and the difficulties about how the talks will work out that firm forecasts are impossible.
And one of the most difficult factors to model is confidence. So far consumer and business confidence here has held up in the wake of Brexit, with a number of confidence indicators recovering somewhat after an initial wobble.
The opaque nature of our economic figures make it almost impossible to assess the current state of the economy. The best that can be said is that growth remains solid, but that the rate of increase slowed a bit from 2015 and the early months of this year.
Ireland has not been good at “soft landings”. We have, in recent years, tended to have either stellar growth rates or very poor ones. Can we now slow the economy to a cruising altitude of 3 per cent growth and keep it there for a period of years?
If, however, growth was to fall much below this level – say to around 1 or 2 per cent per annum – things would become much more difficult. This is why forecasting is such a precarious business, and why the economic feelgood factor which has started to boost consumer spending and business investment is so fragile.
All this comes as the demands on the exchequer purse are only going one way – upwards. Ministers are desperately trying to fight off demands to unpick the Lansdowne Road pay agreement and accelerate public pay increases. There are ongoing demands to improve public services, particularly health.
And there is an urgent need to increase the level of investment in key areas such as housing, roads, broadband and water to keep pace with social need and the requirements of a growing economy.
The housing crisis, in particular, has emerged as a key issue. A solution is needed, not least for the obvious reason of addressing the homelessness crisis and stopping it getting worse in years to come.
But high rents and the lack of availability of new homes is also emerging as a block to inward investment and, for example, to the State’s attempts to attract banks from London to Ireland post-Brexit.
In its latest report the National Competitiveness council warns that “in a distinct echo of the recent past, our housing market risks undermining our entire competitiveness offering”. Change will take time, it warns, with no “ quick-fix” available and “in a situation where supply is constrained and demand is strong, rising housing prices are an inevitable consequence”.
If the international environment remains benign, the Government will have some scope to try to address these issues. Trump’s election and particularly Brexit are, however, both factors of such significance that the Government is also facing some fire-fighting and potential threats to the growth rate over the next few years. And that’s before you consider the euro zone issues and the threat of election-related upheaval.
There are always uncertainties, of course. And after the crash the economy has shown a remarkable ability to bounce back at a rate not anticipated by all but the most optimistic forecasters.
Given any kind of fair wind, growth can continue and the slow work of rebuilding from the economic crash can take another step forward. But the international challenges are also unprecedented. And after the surprises of 2016, few would make firm forecasts for the year to come.
2017 - The key markers in the first few months ( that we know about!)
– January 20th: The inauguration of President Trump. There is a lot of talk of what he will do in his first 100 days. For Ireland, the key thing to watch initially will be his negotiations with Congress on his proposed tax package, and particularly corporation tax, which he has said he will cut from 35 per cent to 15 per cent. Congress, controlled by Republicans, is expected to broadly back most of the tax plan, although whether it will support a cut in corporation tax right down to 15 per cent is not clear. Some speculate the figure could be closer to 20 per cent. Important to Ireland will also be other changes which Trump has proposed in the tax structure, including incentives to return cash held offshore to the US and less leeway to avoid US tax by holding profits offshore in future. People will also be watching what Trump does on trade, and whether he follows through on promises to impose tariffs on countries which he believes are not playing fair.
- March: Theresa May is due to activate article 50 by the end of March, thus triggering formal talks with the EU on Britain’s terms of exit. Beyond that, a new trade deal will need to be negotiated – something that will likely take years. There is talk of negotiating transitional arrangements for the period after Britain leaves but before a new trade deal is finalised. This is to avoid the so-called “cliff edge” where Britain leaves the EU with no new deal in place, and tariffs and other barriers to trade are immediately imposed, causing huge disruption.
- March 15th: A general election in the Netherlands where the extent of support for Geert Wilders’ PVV party will act as a barometer of support for right-wing populism in Europe. Wilders, on a strong anti-immigration ticket, is polling strongly but could struggle to win power even if he leads the biggest party. If he becomes prime minister he has promised a referendum on EU membership.
- April 23rd: The most closely anticipated election of the year where Marine Le Pen is fighting for the French presidency. If there is no clear winner after round one, round two will be held on May 7th. If she wins, she too has promised to hold a referendum on French EU membership, saying that all the dire warnings after the Brexit vote had proved false. Frexit, anyone?