Pricewatch: The external threats that could send the Irish economy reeling

The economy might be slowly recovering but we remain ever-vulnerable to external shocks, from Brexit and a Chinese slump to rises in oil prices and interest rates

China’s economic slowdown is a worry. Photograph: Reuters/China Daily

China’s economic slowdown is a worry. Photograph: Reuters/China Daily

 

As our political set wring their hands and dance ahead of the inevitable formation of a new government, on some levels things are looking pretty good for a new administration.

The economy appears to be picking up. Unemployment is falling. The tax take is rising. Oil is as cheap as it has been for nearly a decade, so it costs less to refuel a car, heat a home or manufacture products. Low interest rates have given a huge cash boost to hundreds of thousands of tracker mortgage holders, and the euro’s low value against the dollar and sterling has helped exporters and created jobs.

Still, because of the openness and minuteness of our economy, we are almost entirely exposed to external shocks. Kildare Street can do nothing to change that fact.

So what can go wrong outside Ireland in the days, weeks, months and years ahead – and what effect could these external forces would have on Irish consumers?

Brits out?

If voters in the UK opt to leave the EU in an upcoming referendum, it will be bad news for Irish consumers, and not just because of Border checkpoints.

About 200,000 people here have jobs directly related to UK export activity. Nearly half of everything made by Irish firms ends up in the UK, and virtually all our energy comes from there.

Of course, trade between the two states will continue no matter what happens in the referendum, but simple things will change for the worse. The cost of mobile roaming charges in the UK could climb dramatically as EU charging caps disappear. EU consumer protection legislation could also cease regarding purchases made there. So might the protections granted by EU law when booking or taking flights into or out of that jurisdiction.

The EU directive on motor insurance, which mandates that a policy issued in an EU member state automatically covers policyholders wherever they are in Europe, could cease to apply. Oh, and the English language could become less important in the EU.

China crisis

Concern about a major financial crisis hitting China has occupied many minds over recent years. China, which has recorded breathtaking economic growth for more than two decades, appears to be on the brink of serious trouble.

One of many nightmare scenarios sees the Chinese government devalue the yuan to boost flagging trade. This could trigger a rush to covert trillions of yuan into foreign currencies, which would force China to spend big to defend its currency. That would lead to a loss of confidence and an economic meltdown. Exports would shrink dramatically, leading to a global crash that could dwarf the 2008 unpleasantness.

If there is a glimmer of optimism (apart from the fact that none of this might happen), it is that the value of our exports to China makes up a very small percentage of our total exports. So, at least in the short term, individual consumers would be protected. The problem is the short term could be very short indeed. We would have no chance of escaping a global recession.

Oil to play for

Global oversupply, worries about China’s economic slowdown and the sluggish performance of high-consuming rich countries are to blame for plummeting oil prices. Bad news for some, but it has been great news for us.

According to the fuel-tracking website Pumps.ie, the average price of a litre of petrol in the Republic last week was €1.20. Just over two years ago it was €1.53. In September 2012, it was €1.70. At current prices the average Irish motorist will spend €900 less on fuel this year than four years ago.

However, as China moves to boost its economy and the Saudis pledge to work with other crude producers to limit market volatility, there has been a gentle rebound in the price of crude in recent weeks. Some traders and investors think the market might have hit bottom. That means the only way is up, which might be good news for the Saudis and the frackers in the US, but bad news for us.

Time of interest

Few things pose as big a risk to Ireland’s consuming economy as European interest rates. Holders of precious tracker mortgages have enjoyed a financial honeymoon for years as the European Central Bank kept rates at historic lows. This has stopped tens of thousands of people from drowning in the debt swamp.

It really is a big deal. For every €100,000 owed on a 30-year tracker mortgage of 1.5 per cent plus the ECB rate, an increase of just a quarter of 1 per cent adds €13.12 to the monthly repayments. That might not sound like a great deal, but someone on a €300,000 tracker mortgage would need a further €40 monthly, or €480 annually, if the ECB raised rates by just a quarter of a point.

In June 2008 the main ECB rate was 4.25 per cent. Were it to reach that high again, that €300,000 mortgage would cost nearly €700 extra a month, or more than €8,000 a year. And that’s after tax. A person would need to earn about €16,000 extra just to cover the higher payments.

Any ECB increases would also hit standard variable rate mortgage holders in a similar way.

Achtung Deutsche Bank

As we found to our cost as our own financial meltdown picked up speed, if banks need to reassure jittery markets that they are rock solid, there is a problem. Last month Deutsche Bank’s share price hit 30-year lows following a dramatic drop. Chief executive John Cryan had to declare in a very public forum that his bank was “rock solid”. He said there was no reason to panic and called on staff to spread the good news to clients. “You can tell them that Deutsche Bank remains absolutely rock-solid, given our strong capital and risk position,” he wrote to employees.

Germany’s finance minister, Wolfgang Schäuble, also reassured investors: “I have no concerns about Deutsche Bank.” Then the bank began buying back billions of euro worth of unsecured bonds to show everything was fine. We have to hope it is.

And there’s more . . .

An official report on all the threats facing Ireland was published last year and makes for grim reading. It highlights the dangers posed by pandemics and warned that climate change “will have potentially disastrous effects”. It noted that we are vulnerable to disruptions to the supply of oil, gas or electricity, and warned of the risk of terrorist attacks and “the possibility that a state like Ireland would be used as a location from which attacks could be launched into mainland Europe”. It also said that possible reforms to American tax codes “may erode Ireland’s current advantage regarding corporation tax” and alerted us to the dangers from nuclear fallout in the event of an accident across the water.

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