THE EXTERNAL ECONOMIC FORCES
In 2019, the global economic backgrounded was shrouded in uncertainty.
2019 was a challenging year for the global economy. It could be described as a year of sluggish growth, rather than recessionary conditions. Economic growth was the lowest since 2008, with all regions experiencing more subdued growth.
The US economy slowed as the year progressed and this forced the Federal Reserve to reverse course and cut interest rates by 0.75%, having been tightening rates over the previous couple of years. Growth in the Euro Zone was very disappointing, with Germany and Italy moving close to technical recession; the UK economy was undermined by Brexit uncertainty; and Chinese growth slowed due to the US trade dispute and ongoing domestic economic and financial restructuring.
Looking ahead to 2020, while many uncertainties are still relevant, it is possible to be somewhat more optimistic.
- President 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 will also be interesting to see if Trump addresses more trade-related angst at the EU. The indications are that he will.
- The situation between the US and Iran is obviously a source of concern, not least because of the potential impact on oil prices.
- 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. At the moment, as there are few other viable options for investors. Many investors are being pushed out the risk curve.
Despite all of these uncertainties, mainly related to global geo-politics, it is more likely that global growth will be stable or slightly stronger over the coming year.
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.
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 2020. 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.
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 well.
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.
As we move into 2020, I am fundamentally optimistic, but the risks and challenges will have to be managed very prudently.
Author: Jim Power, Independent Economist, www.jimpowereconomics.ie