It has been an eventful year. A general election at home was followed by extended political uncertainty and then the forming of a minority Government involving the first ever tie-up between the civil war parties.
More recently, industrial strife and the circus of the Budget have hogged the headlines.
Nor has foreign news been in short supply. Brexit, Europe's ongoing migration crises and the greatest circus of all, Donald Trump, have been major happenings.
Having been asked recently to give my views on the state of the European economy, it occurred to me that, with so much going on, it had been quite a few months since I'd had a good look under the bonnet of the part of the world that is most important for Irish prosperity. That is, of course, the eurozone - continental Europe is Ireland's most important export market by far, and it is exports which ensure that we pay our way in the world.
Another important eurozone dimension for the Irish economy, and everyone in it, is interest rates. The European Central Bank in Frankfurt sets the price of money. For the large numbers of people with mortgages and other debts, and the many companies with outstanding bank loans, ECB decisions can have a huge impact.
Frankfurt adjusts its interest rate policy depending on inflation and, ultimately, general economic conditions across the entire eurozone economy. Over almost a decade now, owing to the weakest period of economic growth (and inflation) in living memory, interest rates in the Eurozone, and indeed across almost all of the developed world, have been historically low.
Had that not been the case, it is worth adding, the Irish recession would have been even deeper than it was, and would almost certainly have lasted a lot longer. That is because Irish households came to be among the most debt-burdened in the world during the bubble. And, despite repaying some of these debts over the past eight years, we remain among the most indebted.
Around half of mortgages currently outstanding were taken out during the property bubble on a tracker basis. The cost of servicing these mortgages was slashed from 2008, and remains ultra low. That has insulated a great number of households from much worse pain that they would have suffered if they were paying more historically normal rates.
As such, when the ECB decides to start normalising interest rates is a matter of huge concern for this economy. If Frankfurt hiked from zero now to, say, 4pc, it would take so much demand out of our economy that recession would almost certainly ensue.
This has put Ireland in a somewhat strange position. While strong growth in the eurozone economy would be good for this country in many ways, including for exporters seeking to diversify away from the UK post-Brexit, it would also probably lead to a rise in interest rates, something that would be bad for the aforementioned reasons.
So what is the outlook for the eurozone and ECB interest rates?
To answer that question, one needs to consider the strength of economic growth across Europe now, and the related matter of inflation.
Although there are 19 countries in the eurozone, the big four account for 80pc of its economic activity. They are Germany, France, Italy and Spain. Together, they determine what the ECB does far more than what happens in the 15 other member countries.
Germany alone accounts for one third of the economic activity that takes place in the region. While its economic strength is sometimes exaggerated, it is the best-performing large economy in Europe. If Germany were not in the euro, the country's interest rates would certainly be closer to historically normal levels, and it is for this reason that the Germans at the ECB argue against Frankfurt's current low interest-rate policy (they particularly dislike its money- printing policies designed to further boost a weak Eurozone).
France is the eurozone's second-biggest economy. Despite a huge amount of negativity about the French economy, not least from the French themselves, its performance has been closer to Germany's over the past five years than to that of the weaker peripheral countries. Although there has been something of a lull since the spring, the outlook is decent, at least by the standards of recent times.
Italy is the eurozone's third-biggest economy. It is the one that is in the deepest trouble. The Italian economy hardly grew at all in the decade before the 2008 crash; its crisis in the years afterwards was among the worst in Europe; and its recovery remains barely existent.
There is little sign that Italy's long underperformance is about to change. There are plenty more signs of worse to come.
If a major constitutional referendum is rejected by Italian voters in early December, the political situation could further weaken the economy. With a slow-burning banking crisis and one of the highest public debts in the world, the outlook is grim. If Italy goes Greek - and it could very well do so - we are all in very big trouble.
There is much better news from Spain. This week, 10 months of political uncertainty appears to be coming to an end as a minority government is formed. Spain's recovery, from a construction and banking collapse very similar to Ireland's, has been strong over three years. This year's political uncertainty does not appear to have done much to dampen the recovery.
Putting all these pieces together, three conclusions can be drawn of relevance to Ireland. First, the continent's recovery is likely to continue into 2017, but it won't be strong enough to boost the Irish economy much via the export channel. Second, the sluggish eurozone recovery will mean next to no inflation. That, in turn, will lead the ECB to keep interest rates ultra-low, most probably for the foreseeable future - two years or more. While that will be bad for savers, on balance it will be strongly positive for the over-indebted Irish economy. Third, all bets are off if things go south in Italy.
Online Editors
Không có nhận xét nào:
Đăng nhận xét