No special Brexit bank deal as EU plays hardball

The EU is pretty unwilling to allow any concessions that would weaken the structures of the union’s edifice, writes Jim Power.

In recent times, I have tended to wax lyrical about the synchronised nature of the global economy over the past year and a half.

After the horrible decade we have lived through — both domestically and globally — good news was clutched with great enthusiasm, at least by me.

In 2017, for example, every member country of the Organisation for Economic Co-operation and Development (OECD), which has 35 members in total, experienced positive economic growth for the first time in a while.

The momentum coming into 2018 looked very positive and sentiment was generally pretty good.

Alas, there has been a growing sense of unease in recent weeks about global economic and political developments and an element of caution is very definitely becoming more apparent.

A number of factors are contributing to this. President Trump is pushing a protectionist trade agenda, as he promised to do.

This is not good for global growth. Economic and political relations with China have soured somewhat and the tariff intentions of both countries will need to be watched with keen interest over the coming months.

The relationship between Russia and the West has also become quite strained and we tend to hear more and more mention of that dreaded term ‘cold war’. This is also not good.

The Brexit backdrop remains as uncertain as ever and confidence in the UK political apparatus is seriously damaged. It is hard to see how it can be rehabilitated anytime soon.

The EU is, unsurprisingly, playing hardball and it has very clear and very strong views on what is and what is not possible.

The latest indication is that the UK will not get a bespoke deal allowing British-based financial institutions easy access to the EU market.

The indications are that they will have to adhere to the same rules as other non-EU countries currently adhere to.

While there is still a distance to go and there is still massive uncertainty about outcomes, it is clear that the EU is pretty unwilling to allow any concessions that would weaken the structures of the union’s edifice.

This approach is correct, not surprising, and very sensible.

All of these factors have combined to engender a greater level of caution in general economic sentiment, which has manifested itself in an ongoing much more nervous and volatile equity market performance.

While the US corporate season has started off quite strongly, markets are not taking much solace.

The thinking is a little bit confused, however.

While at one level there are concerns that the global economy has softened somewhat after a great 2017, there are also concerns that the Federal Reserve, in particular, is behind the curve and that interest rates will have to rise more aggressively to counter a perceived inflationary threat.

Reflecting this view, the US 10-year treasury bond yield moved above 3% this week for the first time in four years. Some equity analysts have warned that such a level could spark a more aggressive selloff in equity markets than we have seen for some time.

Notwithstanding this general nervousness, the real economic indicators remain quite positive.

This week the IMF updated its global economic forecasts for this year and next. The IMF outlook remains quite upbeat, with global growth of a strong 3.9% projected for this year and next.

Growth in the eurozone is forecast at 2.4% this year, before easing back to 2% in 2019. Such growth rates are close to the potential growth rate for the eurozone and would represent decent levels of activity if realised.

The IMF is concerned about the build up of financial imbalances after a prolonged period of artificially low interest rates and quantitative easing, which will have to be unwound; a shift towards inward-looking policies that would harm international trade; and a worsening of geopolitical tensions and strife.

From the perspective of Irish borrowers, while it is clear that interest rates will eventually have to rise from current artificially low levels, there is very little evidence to suggest that the ECB is remotely concerned at the moment, so it is most likely a story for 2019 or beyond.

The ECB left policy unchanged at its latest meeting yesterday, keeping its commitment to bond buying at a monthly €30bn until at least September, with rates left on hold “well past” then.

ECB president Mario Draghi said policymakers refrained from discussing the end of asset purchases or even the stronger euro, at the meeting, as they focused on gauging the health of the region’s economy instead.