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Future positive

Posted on January 04, 2019 by Tom Healy

Tom Healy, Director NERI
Tom Healy, Director NERI

Let me begin this year with a confession. Had the NERI been in existence 11 years ago in January 2008 we might have anticipated an economic slow down rather than the biggest global economic crash since the 1920s.  Economists and others, naturally, extrapolate from various trends over the preceding years and based on early warning signs of trouble on international financial markets. Maths is just a refined way of presenting assumptions and extrapolations from a known past to an unknown future.

The moral of all this is that predicting the future is tricky and prone to what might be termed extrapolation bias. The most that can be said is that there are, always, upside risks and downside risks. Timing is everything. Eventually, the pendulum swings back and the tide turns. But, the global economy is not comparable to a predictable pendulum or the regular tides of the sea. A metaphor based on the occasional tsunami might be more appropriate. It might only happen once in a generation or two but it will happen again and when it does it is not pretty.

The people living on the shoreline (the poor and the marginalised) take the biggest hit when the big wave of a tsunami hits. The 1755 tsunami triggered by an earthquake off the coast of Portugal wreaked havoc in many areas of the South West of Ireland (though the waves were thought to be only about 3 metres in height). It was a once in a millennium type of event. Yet, another tsunami hit Ireland in 1761. The point is that a once in a while catastrophe can occur in quick succession. There is no predictable mathematical formula. The same observation applies in the case of economics where its practitioners imagine themselves to be social ‘scientists’. The fact that there has been no recession in the US economy since early 2008 and that the economic history of the US in the last century has not known such a long period without a recession does not mean that there has to be a recession this year. But, it is reasonable to expect a recession some time in the US in the next 2 to 3 years. Some of the warning signs are already there.

Some analysts see warning signs in what is referred to as an ‘inverted yield curve’ as a signal of approaching recession. When long-term debt instruments (corporate or treasury) have lower yields than short-term instruments even when they are of the same perceived ‘credit quality’ then this is a strong historical predictor of impending recession. This inversion is rare and when it happened in the late 1970s and again in 2000 and in 2006 it was followed, in each case, by a recession in the US economy. In recent years, the ratio of short-term to long-term yields has been falling and we could be looking at inversion in the next year or two. While that does not equate to recession it usually signals it within months just as storm clouds coming in from the Atlantic signal rain later in the day over Ireland. 

We should take note.

The European economies, and especially the economy of the Republic of Ireland, are intimately tied to global and US patterns not only through trading and banking but through the diffusion of that most nebulous but devastating of realities – confidence.  In the case of the Republic of Ireland, the links with the USA are particularly significant to such extent that a shift in US tax law or corporate behaviour could have disproportionate effects on investment, employment and GDP (especially the latter).

Any downturn or shock to the US economy could impact more negatively on the Republic of Ireland than a Brexit shock in the short-term. In the space of a decade, the share of US companies in manufacturing gross value added has gone from 65 to 80% (helped in part by a rebooking of intellectual property assets in response to international tax policy changes). Think Facebook, Apple, Amazon, Netflix and Google along with some pharmaceutical giants here and then think Dublin, Cork and somewhere in China. It explains a lot.

However, this blogger is not predicting or forecasting that a recession will happen in Ireland this year or next. And were it to happen in the next 2 to 3 years this is not to be taken as confirmation that the NERI predicted a recession in the first place! The key point to note is that developments in the US economy matter a great deal for the Republic of Ireland because of its unique trade and investment ties to its ‘economic mainland’ on the other side of the Atlantic.

In a new year’s cheerful spirit Michael Robert’s Blog - Forecast for 2019 suggests that a recession is looming in some advanced economies this year. He may very well be right. His blog-site is suitably entitled with a reference to ‘the next recession’ (thenextrecession.wordpress.com). The blogger, a marxist economist, is of course right in saying that it is a matter of time before the next recession. Two caveats are in order, however: we do not know when the next recession will be, and secondly each recession is followed by a recovery or even a boom. Moreover, there is a very long-term political cycle in which different regimes follow each other as we saw with the temporary experiment with centralised socialism in the 20th century.

What does 2019 hold for workers, businesses and public agencies? One thing is certain - lots of uncertainty abound. However, opportunities also present themselves in all sorts of surprising ways. Brexit – if happens and as of the 7th of January 2019 we don’t know for sure if it will or how it will if it does – might spell disaster for many sectors, firms and communities from Sunderland to Strabane and Strokestown. Yet, it could open up new opportunities, for example, for exporters, here, of food and drink to India or China. Yes, borders do matter and a UK exit from the EU is very likely to negatively hit both the UK and Irish economies this year. However, a hit is relative to what would have held in the absence of Brexit in this case. GDP or some other measure of economic output might still grew very significantly in the Republic of Ireland and less so in the UK. What was the economic impact of the French Revolution? It is too early to say!

The worst of times open up business opportunities in all directions. Irish agriculture boomed during the catastrophe of World War 1 while industry stagnated during the international post-war miracle in the 1950s. The demise of one technology, sector, country or empire might spell unplanned and unexpected opportunity in another. Finland re-invented itself in the aftermath of the collapse of the USSR in 1991. Remember Nokia; it helped fuel Finnish recovery and growth in revenues not unlike the way some large corporations are doing right now in the Republic of Ireland. Decline in Nokia’s fortunes set in around the time that the dot bubble burst in the early noughties.

What might Ireland look like in 11 years time in 2030? That is up to voters, workers, consumers and investors. We might be close to 8 million people on an island within a European market? We might show the lead on investment in renewables, public transport, energy efficiency and transformation of agricultural methods? We might even abolish homelessness and child poverty?

Let me finish with a type of new year resolution – the future is positive if policy makers, businesses and civil society want to make it so. We have choices and ways of making the best out of the worst.

Digital Revolutionaries