The world outlook: ‘Uneven and unspectacular’  

The past year has been full of unpleasant surprises, most notably Britain’s decision in its June 23 referendum to leave the EU.

This will have serious ramifications for Ireland going forward as will the election, on November 8, of real estate mogul and reality TV star Donald Trump as the 45th president of the US — especially if he delivers on his promises to impose tariffs on trade and to cut the country’s corporation tax rate to 15%.

However, it is Brexit that poses the biggest threat, although so far the impact on the Irish economy has been negligible.

The economy is on course to post a growth rate of over 4% in real terms in 2016, and net employment is likely to have increased by more than 50,000.

One can only speculate as to how Brexit will impact Ireland in the coming months and years, but there is likely to be a negative impact on trade. 

The UK is the second largest single-country for Ireland’s goods and the largest for its services. At the same time, Ireland imports 30% of its goods from the UK. 

While the UK might only account for 16%-17% of Ireland’s total exports, 30% of all employment is in sectors which are heavily related to UK exports. 

SMEs (agri-food and tourism) will likely be more affected than larger companies by the introduction of tariffs and barriers to trade.

Mr Trump will be inaugurated on January 20. There is a lot of optimism about as regards the world economy next year, but for all the talk of huge tax cuts from the Trump administration, the economic outlook looks similar to 2016: Uneven and unspectacular.

But the main political developments in 2017 will take place across Europe. The resounding “no” from Italian voters to prime minister Matteo Renzi’s referendum on constitutional reform on December 4 was not a rejection of the EU and its single currency, as jubilant populists from across the bloc have claimed.

Still, the vote, which has pushed Mr Renzi out of office, does represent a significant setback for Europe at a time when its leaders are scrambling to mount a credible response to Brexit, the election of Mr Trump and their stubborn economic woes at home.

In one fell swoop, it adds another country to the list of EU members that are likely to be preoccupied by domestic politics in 2017, a year in which the Dutch, French, Germans, and possibly the British, will go to the polls.

And it sends a warning to other European reformers such as Francois Fillon, the conservative frontrunner for the French presidency, who has promised no less than five referendums to push through his domestic agenda if he is elected in May.

Mr Renzi, seen by his European partners as an anchor of stability in a country where political upheaval has been the norm for decades, won just over 40% of the vote in the referendum, a far worse result than polls had predicted. 

His defeat came only days after deeply unpopular French president Francois Hollande, also a leftist, bowed to political realities and announced that he would not seek a second term.

Mr Renzi’s departure could lead to early elections in Italy next year. It increases the risks of the anti-EU 5-Star Movement gaining power, although the prospect of that remains slim. After the Brexit vote went bad for David Cameron in June, it is the second time in half a year that the leader of a major EU member state tied his future to a referendum and lost, a development that has been seized upon by the region’s anti-EU firebrands.

But, unlike in Britain, polls show that a solid majority of Italian voters are in favour of both the EU and the euro. 

They were encouraged to vote no by all of the major parties in Italy outside of Mr Renzi’s Partito Democratico. His defeat, therefore — which came on the same day that Austrian voters rejected a far-right presidential candidate — looks less like a rejection of Europe and the political establishment, and more like a serious miscalculation on the part of Mr Renzi.

When a prime minister, who will always be remembered for taking office through an old-style party coup, calls a national referendum in a country that is still struggling to emerge from a triple-dip recession, he can expect an unfavourable result.

That will not cushion the impact for Europe, whose leaders have promised to unveil their post-Brexit vision for the EU in the Italian capital in March, the 60th anniversary of the bloc’s founding Rome Treaty. 

The same month, Dutch voters will go to the polls and British prime minister Theresa May is expected to invoke Article 50 of the EU treaty, legal challenges permitting, triggering a tight two-year countdown to Brexit — a timeline made all the more difficult by Europe’s heavy election calendar.

Only a month later, the first round of the French presidential election will take place. Polls suggest that will produce a showdown between Marine Le Pen of the far-right National Front and Mr Fillon, the hard-line conservative who is advocating a radical overhaul of the French economy through deep cuts in public sector jobs and the scrapping of the 35-hour working week.

Mr Fillon has proposed a total of five referendums: One to enshrine a balanced budget law in the constitution, a second to overhaul French territorial authorities, a third to unwind France’s generous pension regimes, a fourth on immigration quotas and a fifth — in an echo of Mr Renzi’s own referendum — to reduce the number of parliamentarians. 

Far more than the Italian referendum, the French vote is shaping up as a make-or-break moment for Europe and its political mainstream. 

Mr Fillon, no doubt, will be watching what is now unfolding in France’s southern neighbour as he girds for battle.

And then, if Europe gets through all that, it still has a German election in the autumn in which chancellor Angela Merkel will be seeking her fourth consecutive term in office.

Ms Merkel faces perhaps the biggest test of her career: Defending the European and transatlantic status quo amid huge uncertainty for both.

Already chancellor for 11 years, she must now anchor a western alliance shaken by Mr Trump’s US victory and bind together a European Union in which Germany has forged its post-war identity but which now risks breaking apart. 

What is more, with the imminent departure of US president Barack Obama, Ms Merkel alone stands as the West’s last great hope for liberal democracy — a mantle she must assume from a position of diminished standing at home, and which may prove too much. 

She is tough, and she will need to be.

Some, of course, will argue that the election of anti-establishment parties in Europe may not be a bad thing, as it should put an end to austerity and boost spending, though the big worry on this front is that their election could potentially lead to Brexit-like votes on EU membership in their countries.

However, calls for eurozone governments to ramp up spending to bolster their economies are falling on deaf ears, estimates of member states’ borrowing in bond markets next year suggest.

Market estimates show debt sales rising by €20bn-€40bn across the 19-member bloc in 2017, largely due to more bonds needing to be rolled over. So far, there is no sign of governments borrowing more to meet European Commission calls that they leave austerity behind and loosen the purse strings. 

A mountain of debt, raised to weather the 2008 financial crisis, continues to restrict most governments’ spending, while Germany — one of only a few candidates for fiscal expansion — remains fixated on balancing its books.

The uncertain political backdrop in euroland is likely to weigh negatively on the single currency in 2017.

I can see the dollar, helped by higher interest rates, rallying against most currencies next year, including the euro, sterling and the yen.

Another big winner on the currency front should be the Swiss franc, with every chance that it and the dollar will both hit parity versus the euro at some point over the next 12 months, though that could result in remedial action being taken by their respective policymakers to limit the damage.

Such an appreciation of the dollar would be bad news for those holidaying in the US next year, but be positive for Irish tourism as it tries to attract more American visitors into the country.

Given that the eurozone’s political woes look potentially greater than the UK’s next year, I hold the view that the pound will be closer to 80p than 90p versus the euro at the end of 2017 and stronger than at the end of 2016. That would be good news for the Irish export sector.

Alan McQuaid is chief economist at Merrion Stockbrokers


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