John Whelan: More support needed for businesses as recession threatens our trading partners

Businesses will need more support, such as the export credit guarantee scheme, says John Whelan. Picture: Larry Cummins

Recession risks are now rising across Ireland’s main trading partners, with prospects for the British economy of most concern.

Our largest trading partners, the US, have warned of a potential recession with economists and financial market analysts forecasting an economic contraction during the first six months of 2023.

The Federal Reserve are set to further increase bank interest rates to combat the worst price inflation in nearly four decades, indicating that they will “tolerate a modest recession,” in the process. This could cool Irish exports to the market which have been rising rapidly so far this year.

In the euro area, the European Central Bank in its recent forecast was bullish about economic growth, despite all the energy supply problems brought on by the Russian invasion of Ukraine, but said it will fall in 2023, as economies such as Germany and Italy struggle with energy supply issues. But the ECB warns that this is a best-case scenario.

Again, there are strong indicators that the euro area could slip into recession next year if the war in Ukraine and the rolling lockdowns in China continue.

Again, not reason to be bullish about Irelands prospects for export growth into Europe over the coming 12 months.

Most worrying for Irish businesses, who have long term strong export, import and investment relationships with the UK, is the political turmoil that has disrupted the trading landscape.

Growth forecasts downgraded

Earlier in October, the International Monetary Fund (IMF) published new forecasts for the world economy. The IMF downgraded 2023 GDP growth forecasts for many countries, reflecting a “sharper-than-expected slowdown” due in part to high inflation.

Surprisingly, the IMF forecasts does not indicate a recession in Britain next year, but slight growth ahead of Germany and Italy, which it expects to go into recession. However, the IMF forecast was issued before the ill-fated mini budget was released.

Irish businesses have continued to trade despite an uncertain environment due to issues like energy bills, exchange rate volatility and interest rates at their highest for many decades.

Understanding how businesses are responding to this situation is important for the state agencies such as Enterprise Ireland, Bord Bia and the IDA, who need to know where best to intercede to support businesses to survive and maintain their position with overseas customers.

In some sectors, retained earnings, profit margins and potential productivity growth may arise such that firms have some capacity to absorb higher input costs without having to increase prices to their customers or cut back on production.

However, this may be a risk not worth taking for some businesses due to rising costs plus the tight labour market conditions, with many concerned that the worst is yet to come.

Energy crises

Many expect a more intense and protracted war in Ukraine to further deteriorate the energy crises, pushing up inflation further and for longer, resulting in lower opportunities for export sales, investment and profitability.

Without more support from the state agencies many otherwise viable companies will be forced to exit hitherto serviceable markets.

Minster for Finance Paschal Donohoe tried to mitigate the near-term impact of higher inflation through budget measures. Funded primarily by windfall corporation tax receipts.

Around half of the measures would appear to be untargeted. Businesses, particularly those trading with Britain and further afield, will need more targeted support, such as the frequently requested export credit guarantee scheme, used extensively in other jurisdictions to support their export industry, particularly in times of high trading risk, such as we are now experiencing.

As the economy for the past few years has been buoyed up by export growth, without more targeted support for the sector, a hard landing for the economy may be difficult to avoid.

• John Whelan is a consultant on Irish and international trade