The real economy and financial markets appear to be in parallel universes currently and a debate is under way about whether they will collide with damaging consequences.
Since the end of 2015, equity, bond and foreign exchange markets have exhibited remarkable levels of volatility, with a pronounced emphasis on negative price movements. Most major equity indices are still down about 10 per cent. This turbulence contrasts sharply with the facts in the real economy, particularly in the so-called developed world.
The large North American and European economies turned in to 2016 with high levels of employment, benign input cost inflation and continued material levels of investment and expansion.
That top-down perspective has been complemented by Irish operating companies that have released up-to-date financial results together with guidance about current trading. DCC, Smurfit Kappa and Ryanair have all reported on international business conditions in recent weeks. Aside from strong profits during 2015, they have noted relatively normal market conditions in their industries, where demand and budgets are in line with prior expectations.
In the next month a wide range of Irish companies covering agrifood, construction, financial and industrial markets will report too. If these also affirm that their markets are behaving normally it will pose interesting questions about the alarm klaxons in financial markets recently.
How this dichotomy unfolds will dictate how Ireland evolves over the coming quarters and years. Unlike the US or large European countries, Ireland is a classic small and open economy where investment, labour, goods and services flow freely on and off the island. We exist as a child of the global economy, so any untoward trends across the world can wash up on our shores quickly.
The economic stars have aligned in the past three years as growth in major trading partners such as the US and Britain has been accompanied by a weak euro compared with sterling and the dollar.
Falling energy costs are a boost for our import-dependent energy needs, while the domestic economy has been recovering from record lows that make year-on-year momentum an impressive contributor to top-line GDP growth.
Raising eyebrows
If any of these key positive factors stall or reverse they will impact on employment growth. Sterling, for example, fell about 8 per cent against the euro in January, raising eyebrows among Irish exporters. Dairy markets are weak due to limp Chinese demand and rising production levels, especially in Europe, including Ireland. Lazy analysis suggesting Ireland is set for permanent linear growth needs to be treated with caution when set against a long-term record of volatility and forward-looking concerns about Brexit, China and geopolitical vibrations across the Middle East and Europe.
There are critical internal levers at play too. Nothing is more important in the short term than how the political classes shape up to govern after this week’s election. Every €1 billion borrowed by Ireland to pay wages and fund schools costs less than €10 million a year to service currently, whereas Portugal pays 350 per cent more than that, and Greece can access money at 11 times Ireland’s cost.
These huge variations relate entirely to the dysfunctional government scenarios in Portugal and Greece, together with sets of national accounts that make Enron look like a paragon of virtue.
Ireland, through a painful series of tax hikes, pay cuts and spending contractions, has delivered an economy that has a reputation for paying its bills. This explains why global pension funds and insurance companies trust us with money costing less than 1 per cent to fund essential services now. After the election, those given the mandate to represent us need to shape an administration that maintains our funding costs low and keeps a weather eye on an ever-changing global economy.
Irish stock-market-listed industrial companies have managed the economic hurdles well, evidenced by continued expansion and investment while growing profits and cash flow. This helps explain why the ISEQ index is 180 per cent above its 2009 low and the looming financial results season is likely to illustrate how conservative yet ambitious management can steer businesses through tough times. We need that spirit of confidence and prudence in the political system too.
Joe Gill is director of corporate broking with Goodbody Stockbrokers
