The official forecasting agencies such as the IMF and the OECD are expecting 2019 to be another reasonable year for the global economy, but growth is expected to ease somewhat and the risks are correctly deemed to have been heightened considerably.
The key global risk factors in 2019 are likely to include:
- Growth in the US, UK and Euro Zone is likely to continue to ease. In the emerging world, a number of countries are in deep trouble, including Argentina, Venezuela, Brazil, Turkey and Pakistan.
- President Trump’s push towards trade protectionism does pose a significant potential threat to the global economy. His trade spat with China should give cause for concern.
- Global geopolitics look very risky at the moment, with Russia and the Ukraine, the rise of the right across the EU; the riots in France; and the rise of populist politics globally a cause for concern.
- The ECB stated in June its expectation that interest rates would not have to be increased until the end of the summer of 2019, but it is possible based on recent slower growth in the Euro Zone, that rates might just remain on hold throughout 2019. This is good news for borrowers, but is happening for negative economic reasons.
- Corporate debt levels are very high in China and the US.
- Brexit is still shrouded in deep uncertainty and does not accommodate the application of any semblance of logic.
- After a very strong nine year ‘bull run’ global equity markets have become volatile and quite vulnerable to a more significant correction. 2018 was a challenging year for investors and 2019 promises more of the same.
The Irish growth performance in 2018 was strong and reasonably broad based, with most sectors making a solid contribution to the growth backdrop.
Consumer spending continued to expand, but it is worth noting that the personal sector is still behaving in a relatively cautious manner. Consumer confidence fell to a 46-month low in October reflecting this caution. Although it recovered modestly in November, the personal sector remains pressurised and quite fragile. Consumer facing businesses are still dealing with a personal sector that is resistant to higher prices and is constantly seeking value for money. This consumer behaviour is due to the fact that personal finances are still stretched due to low wage growth for the past decade; a high personal tax burden following a difficult fiscal decade; uncertainty relating to the impact of Brexit; and rapidly escalating house prices and rents that are soaking up disposable income, leaving less money available for other discretionary spending.
On the export side of the economy, the value of exports expanded by a very strong 12.2 per cent in the first 9 months of the year. A note of caution is that exports to the UK were down by 4 per cent, reflecting slower growth in the UK economy and the weakness of sterling.
The most positive feature of the overall economic performance in 2018 was the labour market. In the year to September, the number of people at work in the economy increased by 66,700 or 3 per cent, taking total employment in the economy up to a new high of 2.27 million.
Looking ahead to 2019, the outlook looks reasonably good, but the risks and challenges are quite clear. Apart from the aforementioned external issues, the key domestic challenges include:
- The imbalance between demand and supply in the housing market, which is putting considerable upward pressure on house prices and rents. It appears likely that house price inflation will moderate in 2019 due to affordability issues, but rents look set to remain under considerable upward pressure. Housing supply needs to increase.
- The pressure to increase expenditure on public services, particularly health, will remain strong and will pressurise the public finances. Ireland still has a dangerously high level of Government debt.
- As the economy steadily moves towards full employment, wage pressures are likely to intensify and the recruitment and retention of workers will become a bigger challenge for all employers.
There are always risk factors out there that will need careful watching, but on balance it does appear that growth in Ireland in 2019 looks set to be softer in 2018, but a reasonably strong level of economic activity still looks the most likely outcome. However, we do need to manage the economy and the public finances in a very prudent manner in the face of such intense external risk factors and domestic pressures.
2019 will be a more challenging & uncertain year for Ireland.
Author: Jim Power, Independent Economist, www.jimpowereconomics.ie