By Jim Power – Economic Analyst
THE EXTERNAL BACKGROUND
Coming into 2019, there was an expectation that the year ahead was going to be more challenging for a variety of reasons, and that is exactly how it turned out. Global growth slowed as the year progressed. Thankfully, the economic recession was not experienced, but rather it was a year of modest growth, muted inflationary pressures and considerable uncertainty emanating from the US/China trade dispute, Brexit and a generally more uncertain and fractious global geo-political environment. It is true to say at the moment that global politics are much more worrying than economic fundamentals, but of course, politics have a way of feeding into sentiment and economic outcomes.
The US economy slowed as the year progressed and this forced the Federal Reserve to reverse course and cut interest rates three times by a total of 0.75%. The US central bank had been tightening rates between December 2015 and December 2018. Growth in the Euro Zone was perhaps the biggest disappointment. Germany and Italy moved close to technical recession and inflation remained well below the European Central Bank’s target of 2% or slightly lower. There was no surprise in the fact that the UK economy was undermined by Brexit uncertainty and business investment, in particular, was in a state of uncertainty-driven paralysis. Chinese growth slowed due to the trade dispute with the US, and ongoing domestic economic and financial restructuring.
All in all, global growth outturn was the weakest since the calamitous events of 2007/2008.
Looking ahead to 2020, it is possible to be somewhat more optimistic, but it would be naïve to become complacent about the very real risks and challenges. The stuff that was relevant last year will likely remain relevant over the coming year.
- Donald Trump faces an election in November and he will be keen to avoid a sharp slowdown in his domestic economy caused by a trade war with China. Consequently, progress on the trade dispute has been made and on January 15th he signed a Phase 1 trade agreement with China. This removes the immediate threat of an all-out trade war, but there can be no guarantees that there could be a further outbreak of trade hostilities down the road. It is hard to see the Chinese delivering on all of their commitments. There is a distinct risk that Trump might direct some of his trade ire towards the EU.
- The situation between the US and Iran is obviously a source of concern, not least because of the potential impact on oil prices. This situation appears to have eased, but anything is possible in a US election year.
- Global equity markets are at very elevated levels, and the risk of a serious correction at some stage cannot be discounted, but market sentiment remains generally positive. In 2019, the S&P 500 expanded by 31.2%; the FTSE 100 by 19%; the German DAX by 25.5%; and the French CAC by 26.4%. A fantastic year for equity investors, coming after a lot of fantastic years. There are few other viable options for investors at the moment and equities remain the preferred investment choice, despite their elevated levels and many investors continue to push out the risk curve.
- Bond yields look set to remain at historically low levels. In response to the sharp slowdown in the Euro Zone economy, the European Central Bank (ECB) has re-commenced Quantitative Easing (QE). Consequently, there appears to be no possibility that the ECB will change its zero-interest rate policy during 2020. US rates will probably remain on hold and likewise with the Bank of England.
- The UK will leave the EU on the 31st of January 2020. At that stage, we will enter a period of uncertainty as negotiations between the EU and the UK get underway in relation to the future trade relationship. Following the passing of the Withdrawal Bill by the UK parliament, an eleven-month window is now looking likely for the transition period. It can be extended, but the UK would have to apply for such an extension by July 1st In the Withdrawal Bill, it was specified that an extension to the transition period would not be sought. This, of course, can be amended, but the Prime Minister appears to have no interest in doing so. This does pose a potentially significant problem around the turn of the year. The news flow from the trade talks will be watched with very keen interest. The big question is just how realistic it is to suggest that a deal can be done by the end of the year, thereby ending the transition period. It seems inconceivable that such dramatic progress could be made in just 11 months.
Despite all of these uncertainties, mainly related to global geopolitics, it is more likely that global growth will be stable or slightly stronger over the coming year.
The International Monetary Fund (IMF) published its latest global economic outlook to coincide with the Davos event. The growth forecast for 2020 and 2021 has been revised modestly downwards since October. Global growth is estimated at 2.9% in 2019 and is forecast to increase to 3.3% in 2020 and 3.4% in 2021. This points to a continuation of sluggish growth, with downside risks. The downside risks identified include rising geopolitical tensions, particularly between the US and Iran; intensifying social unrest; a further worsening of relations between the US and its trading partners; and deepening economic frictions between other countries. The IMF is warning that a materialisation of these risks could cause global growth to fall below the projected baseline.
US growth is projected to slow from 2.3% in 2019, to 2% this year and 1.7% in 2021. This slowdown is predicated on a return to a neutral fiscal stance following the once-off impact of Trump’s tax-cutting package, and a waning appetite for looser financial conditions. Growth in the Euro Zone is projected to go from 1.2% in 2020 to 1.3% this year and 1.4% in 2021. This should guarantee rock bottom ECB interest rates for some time yet.
THE DOMESTIC ECONOMY
The Irish economy performed well in 2019, despite the global economic uncertainty and Brexit. The momentum going into 2020 remains very solid, with almost all economic indicators still performing strongly.
In the early days of January, the Department of Finance updated its growth forecast for 2020 reflecting the lessened risk of the potential for a disorderly Brexit in 2020. The revised forecasts are predicated on a free-trade agreement between the EU and UK that mirrors existing arrangements or the agreement of an extension to the transition period.
GDP is forecast to expand by 3.9% this year and employment is forecast to expand by 42,000 or 1.8%. GDP growth of 3% is forecast for 2021 and an employment increase of 40,000 or 1.7%.
These forecasts look realistic based on the facts available at the moment. It seems probable that the Irish economy will perform strongly in 2020 and this should be supportive of consumer spending. However, the Irish consumer is still behaving in a relatively cautious manner. Personal spending power remains under pressure from increasingly expensive big-ticket spending items such as rents, mortgage repayment, health insurance and dwelling insurance. The personal tax burden also remains high.
General Election 2020 should not change the economic outlook in any meaningful way, but a period of intense political uncertainty following the election would not be helpful for consumer and business confidence.
The key challenges on the domestic agenda will be the uncertainty surrounding the global economy; Brexit; the housing situation; and the pressure to increase expenditure on public services. An added risk is the reversion to ‘auction politics’ over recent weeks and we can only hope that whoever is in power, will not lose the run of themselves. Ireland still has a high level of debt and fiscal prudence should ideally remain the name of the game regardless of who is in power. Failure to form a stable government would not be good and could threaten an otherwise positive outlook.