Ireland weathering the storms and moving in right direction

For the small and very open Irish economy, 2017 set a positive backdrop and one that was reflected in a strong Irish growth performance, writes Jim Power

Ireland weathering the storms and moving in right direction

It is a fact that economic forecasting is always vulnerable to political realities.

It is fair to say that 2016 was an extraordinary year on the global geo-political front.

In June of that year we had the momentous referendum vote in the UK to leave the EU and then in November we witnessed the equally momentous election of Donald Trump as US President.

Both of those events were really a kick in the teeth for conventional politics and sent out a strong message about the growth of political extremism.

That set a nervous backdrop as we moved into 2017, given the busy European political calendar that lay ahead; with important elections in the Netherlands, France and Germany.

In the event, extremist politics were rejected in France and the Netherlands. The German outcome was less positive, with the rise of the far right and a definite weakening of Angela Merkel’s political standing. Somewhat worryingly, we are seeing the growth of the far right in Austria, Poland and Hungary.

However, in overall terms, politics during the past year were better behaved than the previous year.

Further afield, the spat between Donald Trump and Kim Jong-un did attract some attention, but thankfully two narcissists playing deadly serious childish games did not escalate into something more serious – or at least not yet.

On the economic front, it was definitely the best year in a decade. The key global economic theme during the year was economic recovery virtually everywhere.

The US economy expanded at a steady pace, with most economic indicators performing quite strongly. Consumer confidence reached the highest level in 17 years in November.

President Trump immediately tweeted his joy and, not surprisingly, took credit. His critics were quick to respond, suggesting that he had nothing to do with it.

However, I suspect that if consumer sentiment had fallen to the lowest level in 17 years, those same critics would be crediting him. Whatever the truth is, the US economy is undoubtedly performing pretty strongly.

Without doubt, the most positive economic surprise during the year was the eurozone. It experienced a strong and geographically broad-based and increasingly sustainable economic recovery.

In fact, in the second half of 2017, eurozone growth surpassed that in the UK – it is quite some time since that happened.

The UK economy had held up well in the aftermath of the Brexit referendum as the weakness of sterling gave a significant boost to the export sector in general, and the manufacturing sector in particular.

However, as the year progressed, consumer spending was gradually undermined by higher import prices on the back of sterling weakness, and a growing level of business uncertainty.

No surprises there as Brexit is the most unpredictable and most significant source of uncertainty to hit the UK economy in generations. Brexit dominated political and economic discourse in this part of the world.

On March 29, prime minister May invoked Article 50 and began the formal two-year process of leaving the EU.

In June she sought to strengthen her political hand by holding a snap general election, but this backfired very badly.

Her grip on power is now dependent on the DUP party and she ended the year in a very weak and a very precarious position.

Her ability to get a strong deal that would benefit the UK economy in the longer-term was seriously damaged.

With the exception of the US, the interest rate environment was pretty uneventful. The US Federal Reserve increased rates three times during the year, by a combined 0.75%.

The Bank of England increased rates by 0.25% in November, taking its official rate up to 0.5%, due to rising inflation.

Of more significance for Ireland is the fact that the ECB did absolutely nothing with official rates during the year and remained very relaxed about its overall interest rate and quantitative easing (QE) stance.

All in all, it was a pretty decent year for the global economy after a decade of immense challenge. There are still many legacy issues remaining as a result of the 2007 implosion, but at least things are moving in the right direction.

For the small and very open Irish economy, it set a positive backdrop and one that was reflected in a strong Irish growth performance.

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