Giveaway political budget is on the cards despite the Brexit threat
The Irish economic releases have been a mix of the good and the bad.
On the positive side, the exchequer returns for the first half of the year showed the State had an overall budget surplus of €260m, an improvement of €1.1bn on the same period last year. This should, in theory, provide the Government with more room to deliver a giveaway political budget on October 8, and still keep the public finances in balance.
However, a lot could still change between now and then, particularly amid the growing uncertainty over Brexit. The latest deadline for the UK’s departure from the EU is October 31, three weeks after the budget. This means Minister for Finance Paschal Donohoe will have to tread carefully and keep his options open until a clearer picture on the Brexit war front emerges.
Despite his protestations, one cannot rule out a supplementary budget after October, especially if the economy sees a severe downturn in the event of a hard Brexit. A crash-out Brexit remains a real possibility if, as seems likely, Boris Johnson is the next British prime minister.
Indeed, there are already some signs of negative forces affecting the Irish economy.
Although there was good news from the exchequer figures, other data were more negative. There was a small rise in the number of people unemployed in June, andalthough I wouldn’t read too much into what are seasonal issues, there is a mood of cautiousness among consumers, as household deposits at banks hit a record-high of €107bn in May — even with savers getting zero rates of return.
But more worrying was the latest AIB Manufacturing Purchasing Managers’ survey for June, which saw the first contraction for factory output since May 2013.
Although the services sector index for last month was healthy and still expanding, manufacturing is a better barometer of international trading activity. Its weakness reflects the Brexit uncertainty and of course the growing tensions on the global trade front.
As one of the most open economies in the world, Ireland is more vulnerable than the vast majority of countries to increased tariffs on goods and one can’t help feeling that we are so preoccupied with Brexit that we are missing the bigger picture. The world is moving away from globalisation and multilateralism and is being replaced by nationalism and protectionism.
It is probably fair to say that the world has entered a new Cold War and geopolitical risk is likely to increase in the years ahead. Trade will not disappear but will become less important while global growth is likely to track on a more moderate pace.
Economic sectors less dependent on external variables will probably be more attractive. But company profit expectations will have to be brought more into line with a world of greater risk and slower growth.
But I would add that slower growth does not necessarily mean recession, especially with global interest rates set to remain lower for longer.
With Christine Lagarde due to take over from Mario Draghi as ECB president at the beginning of November, a continuation of the Italian’s dovish approach to eurozone interest-rates seems likely for some time to come.
Still, volatility will be a steady companion as the new Cold War deepens.
It was Otto von Bismarck, the key force behind Germany’s unification, who said that “only a fool learns from his own mistakes”.
He went on: “The wise man learns from the mistakes of others.”
All the more reason in my view why Finance Minister Donohoe should adopt a “better safe than sorry” approach on October 8.
