Dark clouds have descended over the UK economy, and the main question now is not if they have descended into recession, but whether it will be a deep or a shallow one.
The troubling thought of a collapsing economy on our doorstep, one we have a long and heavily intertwined business relationship with, comes at a very unwelcome time for Ireland’s traders and the economy as a whole.
A flavour of just how worrying the situation has become in the week, since UK prime minister Liz Truss launched her emergency budget, was the rare and startlingly outspoken public statement by the International Monetary Fund (IMF).
It said the plans for tax cuts and spending will increase inequality and counteract the Bank of England's monetary policy, effectively placing the UK on the IMF’s watch list for the first time since 1976, when Britain faced financial crisis and was forced to apply to it for a loan to bail them out.
Chancellor of the UK exchequer Kwasi Kwarteng’s plan to borrow extraordinary amounts to pay for the biggest package of tax cuts since 1970 unleashed turmoil during the week in global financial markets, with sterling sinking perilously.
Tensions between the chancellor’s office and the Bank of England (BoE) reached boiling point, with the BoE forced into entering the market to buy sterling bonds to enable a return to some level of stability.
Many believe the respite for sterling will be short-lived unless the UK government changes its budgetary approach. The conflicting UK government policies of seeking to ramp up growth via tax cuts are at odds with the BoE’s job of reining in inflation through interest rate rises, and is causing concern for international investors.
Many companies, including many Irish ones, have seen the value of their investments fall as sterling has drifted down during the coarse of the year.
Industry chiefs across the sector have been very vocal in expressing their frustration with what they see as kneejerk reaction by the UK, creating added problems for the industry which have a lot of sterling revenues and US dollar costs.
A further concern for Irish traders to Britain is the potential for widespread collapse of companies if the recession continues across the current year and into 2023, as indicated by BoE.
A report by the think tank Onward estimated that one in five British companies were zombified by September 2020.
These companies, many from the Covid period, are muddling along without ever turning a profit or increasing revenue. Or worse, are running at a loss and building up debts, usually by delaying payments to foreign suppliers, including those in Ireland.
This could create widespread insolvency amongst smaller Irish companies with large slices of their sales unpaid by these companies, who could fail in large numbers across the next two years.
There are however other aspects to the shifting currency and global trade, which is likely to insulate Ireland from contagion from the UK economy woes.
The primary protection being the large portion of our exports in dollars, both to our largest market the US and to many other markets such as South America, Africa and Middle East where trade is primarily in the dollar.