We have got used to trying to assess the damage that may come from Donald Trump’s tariffs and what these might mean for growth and tax revenue.
But as this plays out, uncertainty itself is taking a toll, even if this is not yet showing up in national economic figures bar some wobbles in indices which measure the confidence of consumers and businesses. The Irish economy is experiencing a silent slowdown, driven mainly by a fall-off in capital investment by businesses.
It remains to be seen how this develops. You can plot a relatively benign path out of the current mess – Donald Trump does a longer-term deal with China, avoiding a big threat to the global economy. He also makes some kind of deal – or deals – with the EU which takes a fair bit of risk off the table. Businesses and consumers still face risks and a changed environment, but the worst upheaval is avoided.
This is the scenario the financial markets appear to be betting on. And it is one which could lead to a gradual loosening in the grip of uncertainty on the economy. But for now there is enough anecdotal evidence to suggest that a lot of economic activity is being quietly postponed to see how things play out. And that, in itself, is going to hit growth and jobs if it goes on much longer. No bad thing – perhaps – in an economy already operating at full tilt, though these things can be hard to control.
So far, what are we seeing? There is no doubt, talking to multiple sources, that big capital investment projects are being put on hold. This does not mean they are shelved. But for now those under way are being slowed and most new projects are not starting in many sectors. There are, as one source put it “no long-term commitments to anything”.
In the pharma sector, sources say many companies have put new projects on hold and some have initiated hiring freezes. We have also seen some lay-offs in tech, most recently an international announcement by Microsoft, likely to have implications here. This halt may only now be showing up in construction tenders, but it will have a long tail in terms of activity as decisions deferred now start to feed through in the months ahead. This may also be evident in the supply of office property on to the market over the next couple of years.
The market for mergers and acquisitions has also stalled, as has the venture capital market, generally. Both investors – who provide the cash – and entrepreneurs who spend it are understandably nervous. So far, the signs are that much of this activity is “stuck” rather than scrapped. In the FDI sector, for example, business continues even if major new capital projects are on hold.
That said, there are longer-term questions now facing sectors such as pharma about the level of activity undertaken here. Ireland’s competitiveness shortcomings in housing and infrastructure are playing into the debate in many multinationals.
Economic research suggests that uncertainty affects business investment more than consumer spending. But of course sentiment is vital for consumers, too, particularly in terms of bigger investments in areas like property – or car purchases.
[ US and China agree to suspend almost all tariffs on goods for 90 daysOpens in new window ]
So far property prices continue to head relentlessly upwards, driven by the lack of supply. And for now this is likely to remain the case in much of the market. However, property experts and those involved in the industry are carefully watching the top end of the market, reliant on higher earners, some of whom may now feel their income and various bonus arrangements – or even their future job prospects – are not as certain as they were.
And there are signs of caution. Asking prices are being cut on more expensive houses and apartments in some cases and agents and brokers report that deals are taking longer to get done. A bit of the froth, in other words, is coming off the top end of the market. Deals are still being done, but market players say there are fewer bids and fewer viewings.
Sentiment is vital in the property market and this is an area to watch. “I would have thought,” said one broker “there would be a knock-on effect with all the uncertainty in the world, particularly anyone who is buying from €1 million-plus and needs a mortgage.”
In terms of wider sentiment, consumer confidence in April fell to its lowest level in two years, according to the Credit Union Consumer Confidence Index, driven by fears of a trade war. Consumers are not seeing any immediate change in their circumstances, according to the survey, but are increasingly worried about what is to come. Interestingly, however, there is little sign yet of households adjusting their spending plans, even for more expensive projects like home improvements. Unlike after the financial crash in 2008, they are not being hit in their pockets as of yet, even if an uptick in inflation is also a concern.
How this all develops will depend on the tariff story and the wider policies of the US president. And here your guess is as good as mine, but it is a fair bet surely that while Trump may be drawing back – for now – from the worst of his tariff threats and from the destructive agenda of the so-called “Liberation Day” on the White House lawn, there is a lot to play out here. And a lot of uncertainty on the table is still going to work its way through the economy – and particularly give a knock to new capital investment.
Research published by the European Commission shows investment is the most exposed area to economic uncertainty – consumer spending is also likely to be affected, though not as much. The international and Irish economies have experienced a series of shocks in recent years, it points out, leaving businesses and households to cope with the uncertainties of Covid, the Russia-Ukraine war and a cost-of-living crisis. And now the impact of an unpredictable US president.
[ Irish consumers adopt cautionary stance as housing costs sap investing confidenceOpens in new window ]
Business investment and consumer spending are both based in large part on a view of how the future will look, it points out, and “by hampering the formation of expectations, uncertainty can delay such critical economic decisions” and provide a greater incentive to sit and wait to see how things play out.
This is impossible to measure exactly, of course, and typically economists trying to do so have used text-based sweeps of media reports to look for words and phrases which influence or reflect the public moment – mentions of recession or cutbacks or whatever. The graph shows one such index which charts the uncertainties up to the end of last year – and it is a fair bet that this will also have increased further as Trump has rolled out his plans this year. This uncertainty has been a significant “drag” on the euro zone economy, it says, mainly via its impact on investment. As we know, investment here has bucked this trend, largely due to FDI projects. And it is here that a key uncertainty now lies for Ireland.
All this presents “a very different landscape for the Irish economy than we have had in recent years”, according to the Central Bank of Ireland in its latest forecasts, which focuses in large part on the impact of this uncertainty and involves a cut in growth forecasts. Its governor, Gabriel Makhlouf, said this week that “uncertainty is the new certainty”. And even if trade tensions have eased somewhat over the past few weeks, the impact of this is going to continue to put the brakes on key decisions in the months ahead.
