Paul Colgan: Irish economic performance set for fresh rollercoaster ride

For many people the most disconcerting thing about a Donald Trump presidency is its utter unpredictability.

The idea that the US could be heading in a radically different and unsettling direction leaves a lot of us here in Ireland feeling helpless.

If the last six months has proven anything, it is that we exert very little control over the Irish economy. Actually, forget the last six months — the last two weeks have done that.

Mr Trump, having barely moved from his gold-encrusted tower in Manhattan, has poured Texan gasoline over the Brexit kindling, upending currencies and bond markets, altering expectations and possibilities.

If you were to take the currency movements of the last 13 days alone as a guide to our future then Mr Trump could quite possibly be a very good thing for Ireland.

Once the markets got the faintest sniff that he mightn’t actually be a complete maniac, the dollar soared.

Not only this, the single currency slid against sterling. With worries that Trump’s populism may open the gates to right-wingers and euro-sceptics across the continent, the euro took a pummelling — and Irish business people and farmers breathed a little easier.

So, a double boost for our beleaguered exporters — making them more competitive in two of our biggest export markets.

Meanwhile, Mr Trump has scared the life out of the European Commission. Previously the spiritual home of Europe’s austerity hawks, the Commission Building may be converting rapidly to notions of fiscal stimulus.

The realisation has finally dawned on some of the hawks that the misery inflicted by fiscal consolidation might just send other birds flocking to the nests of Marine Le Pen’s National Front and Beppe Grillo’s Five Star Movement.

Too little, too late perhaps, but any increased spending will be welcomed here. That’s the upside to Mr Trump’s election. But here’s the downside.

It is by no means certain that a number of tax headings will hit their target by the end of the year. Income tax and VAT, while undoubtedly ahead on 2015, are still to deliver the sort of receipts the Department of Finance had anticipated.

Combine this with renewed pay demands and pressure on public services and the State might just need to borrow a bit of money next year. The expectation, just a couple of months ago, is that next year’s budget deficit would be in the range of €1.25 billion to €1.4bn.

The relief seen on the currency front may well be temporary. Should the Italian Government survive and Ms Le Pen not enter the Élysée Palace, then the pound and the euro are likely to resume the relationship not seen since the Brexit vote.

The economy seems to be slowing down. That assumption of a relatively small deficit could soon be revisited.

And this is where Mr Trump comes into play. His promise to spend big has boosted short-term hopes for the American economy but has also raised inflation expectations.

As a result, the record low borrowing costs of recent times have evaporated. The interest rate on Irish debt has increased three-fold since Mr. Trump’s election, from 0.35% to 1%.

So, whereas a deficit of €1.25bn could have been funded just last month at an annual cost of around €4 million, it would now cost the Irish state €12m.

Should rates rise further to 2% then that annual bill increases to more than €24m. And so on and so forth.

Given the worries over an improved offer to Gardaí, costing around €40m, you can see how the numbers could tighten very quickly indeed.

Paul Colgan is economics editor with Ireland Live News on UTV Ireland.