Every new year brings uncertainty. But we head into 2019 facing more than normal. Along with most other western economies we have become used to an extraordinarily long period of growth after the end of the economic crisis. But with fears now growing of a hard Brexit, and with stock markets having had a brutal December, we enter 2019 with the sense that things are changing.
This uncertainty will dominate the early months of 2019 and this in itself will have an economic price. Consumers, businesses and investors try to anticipate events, rather than waiting for them to happen. They will have an incentive to sit on their hands early in the year and see how things pan out – particularly Brexit in the case of Ireland and the UK. If investors are convinced of a no-deal exit, then sterling will be vulnerable well before the UK's exit date.
In the weeks ahead the economic debate here will switch, I believe, into how to protect the gains of recent years. Talk of future tax cuts and spending rises sounds odd, at best, with Brexit just a few months away and stock markets dropping due to concerns about the world economy.
The positive view for this year is that international growth eases back, but recession is avoided in the big economies. We better not call it a soft landing – that term is too loaded in Ireland – but you know what I mean. This would be okay for Ireland.
Political risks
The risks to this relatively benign outlook are largely, though not exclusively political. They are that 2019 will be a kind of year of reckoning for the two big events of 2016 – the Brexit vote and the election of Donald Trump as US president. Both prompted forecasts of an economic hit which – initially – did not arrive. Forecasts of trouble in 2017 proved wide of the mark – and it turned into an extraordinarily strong year. US tax cuts late in the year gave the world's biggest economy another boost coming into 2018.
What has spooked the markets is signs that the tide is finally turning. The US economy is slowing, the boost from the tax cuts is running out and there are worries now about the government's finances. The shutdown of part of the US government because of a dispute between Trump and Congress is just the latest sign of this. Meanwhile trade tensions with China – and the European Union – remain and could explode into further tariffs in 2019.
In Europe, growth has fallen back and the UK is finally starting to show signs of pre-Brexit strain. Add in the complication of the world's central banks trying to unwind the massive stimulus they gave during the crash and you have the recipe that has investors worrying about share price. Indeed, in looking for others to take the blame for the slowdown, the US President is pointing the finger at the US central bank, the Federal Reserve, which is continuing to push interest rates higher.
The irony is, of course, that rather than acting to protect their economies, politicians believe that ideological or populist politics must be pursued despite their damaging economic cost. The question is whether the scale of the upheaval may, at the end, cause them to pull back or adjust their course. Is it still “all about the economy, stupid?” It certainly doesn’t feel like that.
Trump’s threatened tariffs on trade would hit growth and jobs and increase prices for US consumers – for example, they have already pushed up prices of electronics products and hit soybean farmers. If a solution is not reached on trading with China before a Trump-imposed deadline of March 1st,then a full-scale trade war between the world’s two biggest economies will threaten.Remember, too, that trade tensions with the EU also continue to bubble.
And then there is Brexit, a sure-fire way of incurring a heavy economic price in return for some greater control on immigration from other EU countries, itself socially divisive and economically negative – and some fuzzy idea of taking back control. I lost count of the number of people over Christmas who asked whether a “no-deal” Brexit would really be allowed to happen, with all the chaos it would entail. My inability to give a straight yes or no answer was a great disappointment.
UK political chaos
Often economic threats disappear or diminish and things muddle along – the economic crash being a notable exception. The tricky thing with Brexit is trying to see a way out, given the chaos in British politics. And if we remain stuck in, say, February, with no obvious way forward, can a last-minute delay of the UK’s exit be arranged, or some way to move to a transition-style standstill to allow further talking? If anyone is hatching such a plan, we will not hear about it yet, with the EU wanting to keep up the pressure on London to vote through the withdrawal deal.
This is the big disruptive threat to Ireland for 2019. And it presents the Government with a dilemma. If it says that Ireland is "ready", then it will worsen the political hit after a no-deal Brexit, if this is what happens. This is because it is impossible to insulate the economy from the shock of a no-deal Brexit. And, rightly or wrongly, when you are in Government you get blamed when things go wrong. So also expect increasing sharpness in Fianna Fáil criticism of our Brexit preparations, too.
The economy – and politics – is likely to enter a bit of a holding pattern in early 2019, as we wait to see how Brexit plays out. We are likely to see evidence of this in spending, hiring, investment and even house prices.
If a way is found to avoid a no-deal Brexit, then 2019 suddenly looks brighter for the economy, even with an international slowdown. But whether we are as “Brexit-ready” as we can be will be the dominant issue as we enter the New Year.