Chief Economist’s Weekly Brief – Uncertain times

2019 was a year of heightened uncertainty. It was coming from the Brexit delays and negotiations, new resurgence in the trade wars and worsening global economic outlook. Locally, Northern Ireland notched up another year of Stormont in ‘cold storage’. 2020 has a busy brief locally, nationally and globally.


Not fast and furious. 2019 was the year of Brexit deadlock, missed deadlines and extensions. Cue a change of leader, a new deal and an election. The “Get Brexit Done” slogan was seized upon by the electorate. Boris Johnson will serve up his “oven-ready” Brexit deal to Parliament. With a stonking majority, Westminster is set to give the Withdrawal Agreement the thumbs-up. But that’s just the start. Barring another extension, getting the necessary arrangements in place by December 2020 is a tough ask. Then there is the new relationship with the EU… Brexit is a process, not an event.

Choppy waters.  Just as big waves roll-in together, so challenges to the world trading order have come crashing-in thick and fast through 2019. From US-China to Japan-Korea and back via the EU, countries everywhere disagree over terms of trade. World Trade Organisation is now considering a record number of trade disputes, and international trade volumes are likely to have grown just 1.1% in 2019 (down from 5.7% in 2017). New tariffs and policy unpredictability are forming the perfect storm for many businesses, weighing heavily on investment. The tide of globalisation is on the ebb and many fear we’ve yet to see the low water line.

Escape velocity. The UK managed to dodge the two consecutive quarters of contraction in 2019 and has been recession-free for 10½ years. But we are not in a binary world where recession equals ‘bad’ and avoiding one is ‘good’. Expected UK growth of 1.3% y/y is nothing to shout about. Outside of recession, that marks the slowest rate of growth since 1992. Worryingly, business investment had no growth in six of the last seven quarters. That’s unprecedented and guarantees the economy will be stuck in the slow lane for some time yet.

Don’t mention the “R” word. 2019 has been a year to remember for Northern Ireland’s labour market – jobs galore and unemployment hitting an all-time low. But will it last? According to the PMI, business conditions have deteriorated at a rapid pace in H2 2019. Output has contracted at its fastest pace in seven years while other indicators for retail and manufacturing activity have hit decade lows. 11 years ago the PMI reliably signalled NI’s first recession since the early 1980s. It is once again flashing red, albeit a much milder recession than the 2008/09 vintage. The current downturn looks more like the UK’s 1991/92 variety that NI missed. Brexit will sap growth. To what extent only time will tell.

Tale of Two Policies. Monetary Policy across advanced economies is notably squeezed. There is little room to cut rates further. And is it fair to put the burden of economic revival exclusively on Central Banks? Step in Fiscal Stimulus! The current low interest rate environment allows for extensive government borrowing. Proactive public spending to boost growth is what many are calling for. Of course, running high deficits (think US) is a risk but running a budget surplus (Germany) is of little help. The UK announced the end of austerity and hopes to use fiscal stimulus to offset at least some problems brought in by Brexit. Flagging NHS and carbon transition provide plenty of options to spend money.

Reverse gear. What a difference a year makes! In December 2018 the Federal Reserve signalled further Fed fund rate hikes, balance sheet reduction was “on autopilot”. Weaker US equities, however, prompted a swift U-turn in monetary policy in early 2019, culminating in three 0.25% rate cuts amid mounting US growth jitters. With the US labour market resilient and global uncertainty diminishing, the Fed is firmly on hold near-term. ECB policy has also pivoted – the discount rate was lowered 0.1% to -0.5% in September and QE was restarted in November as ECB President Mario Draghi’s reign drew to a close. Draghi’s replacement Christine Lagarde has called for fiscal policy to take up the mantle, as monetary policy runs out of ammunition.

Good Cheer. De Gaulle famously asked; “how can anyone govern a nation that has 246 different kinds of cheese?”. So imagine managing 19 euro area states with wildly different histories, cultures and opportunities. Overall, the EZ economy has slowed this year, with annual growth at 1.2% in Q3 vs. 1.6% in Q3 ‘18. Unusually, Germany is last, at 0.6%, with Estonia top at 4.1%. But longer term, economic differences are narrowing. In 2000, the richest country (Luxembourg) had a GDP per person 14 times the poorest (Latvia). Although the countries have stayed the same, the difference has halved to 7. That’s Christmas cheer.

Disputed. China’s normal role is as the provider of one of the single biggest sources of growth for the global economy. In 2019 it maintained that mantle, expanding by 6.1%, according to the latest forecasts. But the focus has switched to the damage it could do to global growth due to the trade war with the US. The pattern for most of the year was one of escalation with the US and China trading threats and tariffs. So there are very high hopes that as we end 2019 with what’s described as a “phase 1” trade agreement with the US – essentially an agreement not to implement the next round of tariff increases – that starting point can be deepened to a more ambitious agreement next year. The fortunes of many industries depend on it.

Greta effect. Have you ever experienced flygskam or ‘shame of flying’? This new word has appeared in the past year thanks to a Swedish teenager. On a trip to Berlin in March, I saw a fifteen year old address a crowd in front of the Brandenburg gate.  Little did I know that Greta Thunberg would become Time magazine’s Person of the Year for 2019. We have witnessed a new rise of climate change to the top of political and societal agendas.  A growing number of countries, cities and companies set themselves net-zero emissions targets, among them the UK, which enshrined the 2050 target in law. But despite this flurry of activity, global carbon emissions are on track to break another record in 2019. Before the next big Climate summit in Glasgow at the end of 2020 (COP26), we have to move from announcements to actions.

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