Cliff Taylor: The outlook for 2019 brings uncertainty to a new level

Maybe reality is finally catching up. Remember those few months in 2016 when when Donald Trump was elected president and Britain voted to leave the EU? Both led to forecasts that economic turmoil would follow. But it didn't happen. The US economy has surged forward and while the UK economy has been hit, the impact has – to the delight of the Brexiteers – been much less than anticipated. So far.

Perhaps 2019 will be something of a year of reckoning. Let’s hope part of that is not due to a potentially chaotic no-deal Brexit, the likely cost of which none of us really understands. But there are other trends too which suggest that the extraordinary expansion in the world economy since the end of the financial crash, driven in part by a splurge of cheap money from the world’s central banks, may finally be running out of steam. And this, of course, has implications for Ireland.

You will have seen these fears in the financial markets this week, particularly on Thursday when share prices took a nasty tumble and late on Friday, when Wall Street fell again. But the real pointer has not been in share markets, but in the somewhat complex world and low-profile part of the markets where traders bet on where international interest rates are going.

A couple of months ago, investors had put their money on a continued steady rise in US base interest rates, which have already increased eight times from their crisis level of just over zero to just above 2 per cent now. Investors had, up to recently, expected four further US interest rate rises before the end of next year, the first coming this month. Now they expect one, or at most two increases over the same time period. In Europe, meanwhile, market expectations of a rate rise in September of next year are now pushed back to December – or even 2020.

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Trade wars

This is happening because investors worry that the US economy may be starting to run out of steam – or will do so next year – while Europe, after a spurt in 2016, also shows signs of slowing. Slower growth means a lower rate of inflation and so lower interest rates. And here we come back to Trump. For the first year and a half of his term, growth and the stockmarkets were strong and his big tax cut introduced last year gave the economy a boost. Fears of trade wars were put on the backburner, as everyone tried to work out what was real and what was just noise on Planet Trump.

Now the mood is switching. Investors worry that the boost from the tax cuts will soon be over, leaving a hangover for the US government finances. And Trump's talk on trade may be turning into reality. The US and China have already engaged in tit-for-tat tariffs – starting with Trump's move on steel and aluminium imports. While a temporary three-month truce on further moves was agreed last weekend, no one is sure whether it will last. Tensions over the arrest of a senior Chinese executive from phone company Huawei in Canada – on a US warrant – will not help.

Tariffs are something which have been off the front pages for years. Seen as an arcane way of protecting home industries by imposing a special tax on imports, they were gradually whittled away in international trade deals since the 1960s. Now they are back – one of the chosen weapons of economic nationalism.

If the US/China row gets real, it will hurt growth in both countries, all in the hope by the US president that it will get China to change some of its “unfair” trade practices. And don’t forget that trade tensions remain between the EU and the US, too, with Trump continuing to issue threats about putting tariffs on car imports.

Tariffs and barriers

Disruption to trade is also at the heart of fears over Brexit, of course, and particularly in a no-deal scenario when tariffs and barriers to trade would go up overnight and there would potentially be short-term disruption and chaos at ports. Here again there are signs that the reality of what this might mean is finally starting to seep into the political and public consciousness.

The problem with a no-deal departure is that it would lead to a lot of the costs of a hard Brexit hitting in a short period of time, due to significant uncertainty and upheaval to trade and, indeed, to politics. Events in Westminster over the next week may provide some pointers, but no definitive answer.

The message from the markets this week is that the risks from Trump’s trade policy and from Brexit just add to concerns that growth may be slowing anyway. For Ireland this need not necessarily be catastrophic, but it will slow growth in our export markets – and in the economy overall. We should be able to weather a gradual slowing in world growth, though a full-blown trade war or a no-deal Brexit would be another matter.

So we enter 2019 facing a much higher level of uncertainty than normal. This is why all the official bodies – the fiscal advisory council, the Central Bank, the Economic and Social Research Institute and so on – are sounding alarm bells. Often things muddle along and the worst does not happen. But we do need to recognise that the possibilities for 2019 are unusually wide, ranging from a gradual international slowdown to something a good deal more rocky. And that the free international trade environment on which our economic model depends is now under some threat, while some of the biggest stocks to suffer in the latest US falls are the big tech companies on which we depend for thousands of jobs and a lot of tax revenue.

What is for sure is that the extraordinarily favourable period of international growth which has greatly helped our economy to bounce back from the crisis is now – one way or another – coming to an end. Whether Trump or Brexit add further spice to the slowdown is the big unknown. The outlook for 2019 brings uncertainty to a whole new level.