Despite the threat of Brexit, no reason yet to unleash spending

Despite the threat of Brexit, no reason yet to unleash spending

The Irish economy and those with responsibility for managing it find themselves in a very strange place at the moment.

The latest forecast from the Central Bank this week is predicting growth of 4.9% in GDP this year, which is an upward revision on the previous forecast and reflects in particular a very strong export performance.

It is also forecasting the economy will grow 4.1% next year.

These forecasts are not radically different from those of the Department of Finance and will presumably be the sort of growth forecasts on which Budget 2020 will be prepared and presented on October 8.

The Central Bank is very aware of the risks of overheating in the economy and is it is devising the Government to adopt a very cautious fiscal policy approach in the budget.

That pretty much echoes the recent sensible advice from Seamus Coffey and the Irish Fiscal Advisory Council.

This is all well and good but the Central Bank also looked at the possible growth outlook in the event of a no-deal Brexit on October 31.

In the event of such an outcome, GDP would be expected to expand by just 0.7% in 2020; employment would be expected to be 34,000 lower by the end of 2020 than would otherwise be the case, and the employment total would be expected to be 100,000 lower in the medium term than would be the case in the event of no Brexit or a soft variety.

Based on what we understand about a so-called disorderly Brexit, these economic prognostications look pretty realistic.

The key negatives that would flow from a disorderly Brexit would be further sterling weakness, a significantly slower UK economy, and a disruption to trade from tariffs and border checks at ports and airports.

These developments would undermine business and consumer confidence, something that is already mildly evident despite the fact that Brexit has not yet materialised.

Anecdotally, I certainly get the impression that both business and consumers are behaving in a more cautious fashion because nothing undermines business and consumer confidence more than total uncertainty about what the future might look like.

Indeed, absolute uncertainty is exactly what characterises the Brexit landscape at the moment.

But one would have to fear the worse and plan for it, based on the rhetoric from Boris and the nature of the cabinet that he has appointed.

Despite the threat of Brexit, no reason yet to unleash spending

The European Research Group is very much the tail wagging the UK government dog at the moment.

Apart from Brexit, the other source of external uncertainty for Ireland at the moment is the global economic backdrop.

The risks were clearly highlighted this week with the delivery of a rate cut of 0.25% by the US Federal Reserve Bank.

This time last year, the Federal Reserve was on track to increase rates to 2.5% by the end of 2018, and the consensus then was that it could hike rates by a further 1% by the end of this year.

Much has clearly changed over the past year.

Despite a central view that sustained economic expansion, strong labour market conditions, and inflation near the Federal Reserve’s interest-rate committee’s 2% inflation objective are the most likely outcomes, there is uncertainty.

The US central bank is concerned about global economic developments and is sure in the knowledge that inflationary pressures remain very muted and so has decided to take out interest rate insurance just in case.

The ECB looks set to follow suit with limited monetary policy easing over the coming months.

Despite the threat of Brexit, no reason yet to unleash spending

For the Finance Minister Paschal Donohoe, this set of circumstances present a significant quandary.

In what will likely be the last budget before a general election, there might obviously be a desire to expand fiscal policy through modest tax cuts and generous expenditure increases.

But for an economy showing some limited signs of overheating — the Galway Races this week may be one sign of this — fiscal expansion is not warranted.

On the other hand, if Brexit turns out the wrong way and the global economy deteriorates further, looser fiscal policy is exactly what the Irish economy would desire.

It is anybody’s guess at this juncture but it is better to be safe than sorry and present a very conservative budget on October 8.

If things should subsequently go awry, then the fiscal brakes should be taken off, but definitely not yet.

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