In the latest PowerTalks, Jim Power gives his personal assessment of the outlook for the Irish and global economy.
THE GLOBAL ECONOMY
THE YEAR THAT WAS FOR THE GLOBAL ECONOMY
By the middle of February, both of those prognostications were looking valid. A ‘hard Brexit’ was avoided, as the UK left the EU on 31st January and then entered into an 11-month transition period. Furthermore, the US and China adopted a more conciliatory approach to each other and we witnessed some drawback from the trade dispute that had caused so much fear, uncertainty and disruption in 2019.
However, any positive impact from those developments was quickly swept away as the novel coronavirus, COVID-19, first took hold in China and then spread with rapid ferocity across the world. From the moment that COVID-19 was declared a global pandemic in early March, most countries around the world were subjected to varying levels of lockdown and restriction, and this arguably created the most severe economic and humanitarian crisis since the second world war. Unfortunately, as we enter 2021, this crisis is ongoing.
We interviewed leading Irish Economists, Jim Power and David McWilliams to get their personal outlook for this Irish economy in 2021.
00:00:13 John Deehan
Good morning and welcome to the new dawn economic webinar 2021. My name is John Deehan Investment Sales Manager with Aviva. It’s fair to say that 2020 was a year like no other. The arrival of Covid-19 on our shores impacted on every facet of society and lifestyle. Joining me this morning to discuss if 2021 will be a new dawn for the Irish economy are two of Irelands leading economist Jim Power and David McWilliams. Jim, I'll bring you in and happy new year to you.
00:00:38 Jim Power
Many happy returns John and to all the listeners.
00:00:40 John Deehan
More importantly Jim, commiserations on Waterford’s loss in the hurling final, have you recovered?
00:00:46 Jim Power
No, I haven’t actually. I'm living in a house with a Limerick woman and it's not been easy, John. But anyway.
00:00:52 John Deehan
Oh, that’s a salt in the wound Jim. That capped it all in 2020.
Look Jim as I was saying in the opening, it’s fair to say 2020 was an extraordinary year when you factor in the impact of COVID-19, Brexit, the US election. But how did the economy perform amid all this uncertainty?
00:01:11 Jim Power
If you look at what has happened since last March in terms of the lockdown of large swathes of the economy over a protracted period to varying degrees of intensity the overall economic performance actually was very, very impressive. And statically, Ireland would be one of about two global economies to experience positive GDP growth during 2020. However, I would hasten to add that, you know, GDP in an Irish context is definitely needs to be treated with a high degree of caution given the distortionary impact of aircraft leasing intellectual property transactions by the multinational sector and so on. So, if you strip out that distortionary, in fact, the economy last year was definitely an economy of two parts, one side the economy performed very, very strongly. That is, you know, if you work in the multinational sector, or if you're working financial services and professional services in the public sector, it was actually a decent year in terms of maintaining your earning power. And we know for example, that in the first 10 months of the year overall exports are up by over 5% with the chemical and pharma sector, which accounts for 66% of our merchandise exports growing by almost 12%. So, for a reason economy like Cork, you know, where the chemical and pharma sector is very strong. That has been really important. The IDA last week published its end 2020 job results and showed that that during 2020 despite all the difficulties, companies that the IDA support increased their employment by over 8,900. And there's now 257,000 people working in the multinational sector. So that part of the economy growing very strongly. On the tech side, which is a really interesting barometer for what's happening in the economy. Despite the collapse in economic activity in certain parts of the economy. The overall tax take was down by just 3.6%. And amazingly, income tax was down by just 1%. And what that shows us is that large segments of our working population in those sectors as I have mentioned they continue to work. They continue earn, giving the progressive nature of our tax system. They actually higher paid workers pay most of the income tax here anyway. So, the fact that income tax held up well shows you that a large segment of the working population actually continued to do well, economically and financially during 2020. On the other hand, you have those economies that were most adversely affected, so you're talking about anything related to tourism, you know, accommodation, food services, hospitality sector. Of course, non-essential retail outside of the tourism sector, those sectors which were subject to restrictions on an ongoing basis, you know, had a very, very, very difficult year. And that is demonstrated by the fact for example, the latest pandemic unemployment statistics up to January 11th, showed that there were 398,000 workers in receipt of those payments on January 11th. But accommodation and food services and retail accounted for about 43% of total. So that shows you very clearly the parts of the economy that were most adversely affected. So, in around, one other feature of the economy last year, John, which tells the same story is that in the first 11 months of the year, household savings increased by over 13 billion to reach 123.6 billion. That is the highest level of household savings we've ever had in this country. And what that tells us is that number one, people in many sectors of the economy that I've mentioned, continue to earn. And secondly, they lacked the ability or perhaps on the precautionary element but either way they didn't spend very much. So as a consequence, savings have built up very, very strongly. So, in a nutshell in answering your question, the economic performance last year was very mixed. Certainly, large parts of the economy performed strongly and other parts of the economy that were subject to the restrictions, they were the ones that suffered. So, a mixed picture, but overall, I think we should be reasonably happy with the performance of the economy in 2020 in incredibly difficult circumstances.
00:06:10 John Deehan
Ok, a lot of interesting points there you made Jim. One of them was actually highlighting the fact that the government supports as you mentioned the pandemic unemployment payment now and there is that emergence of the two-tier economy, that you mentioned, but how successful were the governments in protecting the Irish consumer and Irish businesses through what you rightfully said, is in a very, very challenging and difficult period.
00:06:34 Jim Power
Well, I actually think you can always criticise policymakers in terms of what they do. And if you think back to that, the middle of March, you know, we were faced with some circumstances that were never before experienced. And I think the government actually reacted quite strongly, quite quickly. You know, they recognised that it was essential to support those households and those businesses that were forced to shut down effectively in the interest of public health. So, the government immediately to step in and provided pandemic unemployment payments, it provided significant support to businesses, and the reality is an important indication was coming into 2020. We were expecting a budget surplus of around one and a half billion. In the event, we ran a deficit of just over 19 billion. Okay, some of that 19 billion deficits were because of increased spending on the health side, which was obviously needed in the circumstances, but there was also a significant increase, a very significant increase in social welfare expenditures. Those are the various pandemic unemployment payments. So, the government, did, and I think correctly so throw a lot of money at those households and those businesses that were most adversely affected by the crisis. And I think what's really important in looking ahead to 2021, as long as these lockdowns last and until normality returns to the sectors that were most adversely affected, I think the government will have to continue to provide financial support to the households and businesses that are at the cutting edge of this pandemic crisis. Because, you know, at the end of the day, businesses were forced to shut down in the interest of public health, and I think they should be compensated appropriately for taking those actions. Okay. And I think secondly, it's really important that when we do start to get some semblance of normality returning to the economy, hopefully driven by vaccines that those businesses will still be around to pick up the pieces and to grow, for example, the tourism sector as International travels gradually starts to re-emerge. So that end of the day, if you do not have those businesses, it'd be really difficult to rebuild tourism, for example. So, the government in my view has done a lot and there is a lot more to do but broadly speaking, you could criticise parts of it. I think, broadly speaking, I think you know, the government did a pretty decent job in supporting those businesses and those households most adversely effects, and I think that was incredibly important.
00:09:25 John Deehan
Okay, Jim, well, this is probably things that we might explore as we go through in terms of what more could be probably done to the economy and society this year. But at this point, David, if I could turn to you next now. Happy new year to you.
00:09:33 David McWilliams
Hi John, are you well? Are you in good form?
00:09:40 John Deehan
All good. I'm slightly worried about you when I saw your beloved Leeds, humbling at the hands of the mighty Crawley Town. I thought you might be too sick to come on and speak to us today. How is morale now.
00:09:57 David McWilliams
These difficult times. These difficult times.
Look at the big picture. We're the premiership for the first time in a generation so it’s always good.
00:10:06 John Deehan
We're gonna spray optimism on this one. So, it is often been said that the darkest hour is sometimes before the dawn. If you look at Ireland just when vaccines were on the on the horizon, there was a hope of return to normality. We've now seen at least two more contagious variants of Coronavirus and I suppose in terms of further lockdowns. This was depressing, again, economic activity. And I suppose, from your perspective then what did the government need to do now to supposed to prop up the economy? Maybe tagging on some of the points that Jim has mentioned?
00:10:36 David McWilliams
Well, first of all, that was very, very comprehensive analysis from Jim about what's actually happening, what has happened, what's likely to happen. My own view is that pandemics tend John to accelerate change. This is the most important thing to appreciate. So, things that were in the ether, in business, in society and economics are profoundly amplified by the pandemic. Whether that’s technology, whether that's the way in which we live. The way in which we regard even what Jim was talking about budget services, etc. But there hasn't been a total mind shift in terms of what we regard as important, and what we regard not to be important. So, my own sense is that the states could be much more active in using the zero interest rates that the ECB has actually afforded the whole of Europe to draw what I call helicopter money in the economy, and I think was a problem for a lot of small businesses that as Jim said, that have been kind of ordered to shut down. And when your ordered to shut down the state has a financial not just morale but a financial obligation to make sure that when you are asked to open up again, that you're actually alive. And the small business, Jim was highlighting there, I called the sector Jim worries about the crack economy, right it’s the economy for people to have crack. Going to restaurants, bars, festivals, etc etc. All those are face to face businesses in which we are very good in Ireland as we're known in Ireland, those businesses I fear John. I fear many of them might not recover in the way in which we think they will. And the reason is the following when you lose your cash flow when your cash flow stops when you are in small businesses and when I hear about the government and politicians and public servants, and I hear them talking about the economy and think wait a second, there is the sector of the economy and we are talking about small businesses here.
Small businesses employ the vast majority of people in Ireland. In fact, half of Irish people are employed in businesses that have less than 50 employees. So, anybody who works in that kind of business understands how precarious and fragile the balance sheet is, precarious and fragile the work force is. You understand the banks are not supportive in any material way unless prepared to pledge property. So those businesses I believe, and I've talked to many of them over the last while, both in person and on the podcast, they all say that while it’s was great to have soft loans from Bank of Ireland or AIB, financed that the length of arm's length from the by the ECB, European Commission or whatever scheme it is. They are not in this position to go up and start filling out forms. So, they actually need is the fear that the cash flow prompts an ongoing default of I cannot pay you and you cannot pay me the problem it defaults in the economy jobs are actually very, they're actually very, very much like the virus. So, if I knew that you ran out of cash John and you owe me money, I'd come to you straight away to demand cash. And if you cannot give me cash I’ll go to the next guy or the next girl. Cash flow problems circulate through the economy like a virus.
Let's say we are now looking into a more severe lockdown if we want to get rid of this. We are now waiting for the vaccines, we can talk about the rollout of the vaccines, which has been pretty poor here. My own sense let's say we're looking at six-to-eight-month period. During this period, I would like to see the states have the sense of urgency, that I hear from small business, it’s not like the state doesn’t care. They just don't care enough. The reason they don't care enough John, is this is not there lived experience public servants. Okay. So that's the first thing cyclical under temporary ramifications of the pandemic. This may be something which could be more interesting and certainly more profound, what I call the structural or permanent ramifications of the pandemic. And that is the way we work. The future of the office, the way we commute, the future of the home.
The future of retail, I don't know about you, but if my daughter doesn't go with two or three Polish lads, every day, knocking from Amazon and stuff and the other. Everybody's online now. Look at the statistics for online shopping it has gone through the roof and the implication from retail and high street rents and property enormous you're looking for example offices if we're not going to go back to offices or if for example Aviva says well you can work a blended week, two days a week in the office three days a week at home. What happens to the commercial property market? How do we reimagine our cities? If you're talk to a lot of people live in towns around our cities and tell you that during the lockdown was lifted. Those trends which used to be commuter towns are incredibly vibrant as cafes, as bars, people are going out here, why, people are not commuting anymore. So, I think we should try and disentangle the first thing if you ask me what the government can do, I believe that helicopter money is the solution that Philip Lane the chief economist of the ECB is trying to urge the bank, or the governments to do basically when you drop interest rates to zero fiscal policy and monetary policy become the same thing. That's the first thing I think great scope there for more help. And again, the reason you give more help is in order to make sure the economy can emerge from this blizzard. The second side is your structural side John. I actually think more interested in what does the Irish economy spoke society looked like in two or three years when this pass and when people get used to working on zoom that clearly is going to be faced to face meetings to do deals or whatever but you know, something like business travel. I spoke to the chief executive of a large, fairly large financial outfit that have a big branch in Ireland. And he said to me look, the first thing he drew a line through was a travel budget our business travel budget. Companies will not spend anything like they use to spend on business travel or what does that mean for a city like Dublin which has loads and loads of hotels. All are very much geared towards the business traveller at least Monday to Friday, John.
If that person was gone, lots of restaurants, so I think there's two sides. The cyclical side, what is temporary and the permanent side which is called structural and interesting thing, and I will be quite optimistic. I think Jim and I chatting a couple of days ago, pandemics because they accelerate change tend to lead to an incredible vibrancy in economics, innovation and technological innovation in the years after that, so I've been quite optimistic. But clearly, we're not going back to normal, and the reason is John normal is what got us here in the first place, we have got to frame the whole discussion, we are not going back to 2018 or 2019. It is going to be quite different.
00:18:14 John Deehan
Just in terms of the global economy. How do you think you it would perform that in 2021? Bearing in mind some of the things you've highlighted there.
00:18:21 David McWilliams
Well, I'll go back to what Jim was mentioning about the savings rate. Okay. So, when people are nervous what we do is we save, we think, Jesus, I'm not sure about tomorrow, you know what I’ll postpone buying that fridge or postpone buying that thing. So, we save significantly in the Irish case. You know, savings rates gone up by 13 odd billion, okay. If you look around the world, you see exactly the same type of figures, right. So, for example, in the EU in general, okay. The savings rate has gone from 15% of income to 27%. That's a phenomenal change, in the US which are not great savers as we know, savings ratios come from 9% of income to 16%.
Now assuming and it is a big assumption but I think it is the right one to make that the vaccine eventually gets rolled and eventually works and this thing passes.
Then the question is, and you've asked for the 2021 prognosis. What are people going to do. I happen to think this summer if this thing is past that it is going to be the most mental party spending outrageous crack of a summer, right, and the second two quarters if the vaccine are successful, we'll see a lot of these savings being unwound, not straightaway but gradually, now that level of demand which has been deferred, if that cascades down to the economy. I think what you're seeing is an extraordinary reversal in and again, Jim is right, GDP figures, headline figures, but I would think that we're in for a serious significant boost to economic activity. Once people think we can emerge out of our basement because that savings ratio, although might not go back to where it was will certainly fall and that means lots of people will go out spending.
00:20:19 John Deehan
So, brace yourselves for the start of the roaring 20s.
00:20:23 David McWilliams
What I am also saying John, things like the debt GDP ratio, the fiscal deficit all those things are actually not necessarily a reflection of an act of government. But more or less a government reaction to something so basically when people start savings the government's job is to start spending otherwise demand will collapse and Jim has said they have done quite well here.
So, people start spending, it is the government jobs started saving, I think the deficit will, I wouldn’t say completely erratic, I think it will fall to very manageable level very quickly.
00:20:59 John Deehan
Ok again reason for optimism. Jim I might bring you back in at this point, as David has mentioned the role, Philip Lane, ECB and the central bank, and he has talked about helicopter money. From your perspective, what do you think they can do to support both consumers, businesses and society in 2021?
00:21:18 Jim Power
Ok, can I just say a couple of things on the global side before I answered that question, specifically, John, I kind of agree with David, in terms of, you know, once successful vaccine programme has been rolled out and, that you know, the pandemic as we know it at the moment ort of passes on which is unlikely to be the first half year and certainly might be the second half of the year. If everything goes well. The outlook for 2021 is obviously going to be very, very heavily determined by the virus and the vaccine, okay, the two Vs would be incredibly important. For policymakers, there's a challenge here because if you suddenly get this strong rebound in economic activities, is there a danger that inflation starts to run amuck.
And I don't I don't know the answer that might I'm inclined to think that you know, there will be a bit of an uptick in inflation, once global activity return. But I think that's exactly what the world economy requires at the moment. And if you could think about it for 10 years, central banks to varying degrees around the world, bank of Japan, bank of England and the European Central Bank. The Federal Reserve have actually been fighting a rear guard action to try and simulate some inflation in the system. So, a little bit of a rebound in inflation would be seen as a good thing by policymakers. But the other point is that in the event of a significant rebound in inflation, policymakers are going to be in an incredibly difficult position. Because as David says, you know, at zero interest rate level, physical policy and monetary policy basically becomes the same thing in the sense that on the physical side government are justifiably running up significant deficits to cope with the crisis so is physical expanse is exactly what is required in other words, and counter cyclical fiscal policy. And at the same time, central banks who run monetary policy have been facilitating that they have taken up interest rates down to zero or virtually zero everywhere.
They have engaged and continued to engage in massive programmes of quantitive easing, pushing bond yields down to historically low levels, and it's incredibly important that those historically low bond yields as long as possible, because the one thing that would really worry, governments around the world would be if quantitive easing started to end, if bond yield started to pick up quite strongly. Suddenly the cost of government financing those big points of deficits would start to become a serious issue. So, in other words, I think central banks are going to have to continue to keep interest rates down, they're going to have to continue to engage in quantitive easing into liquidity provisions. In order bond yields down to enable government to fund their deficits. So that's, that's a bit of a quandary for policymakers but I think the correct approach would be to accept a little bit of inflation but maintain interest rates at the lowest level possible for the foreseeable future in terms of the domestic situation.
David since the beginning of this crisis has spoken about helicopter money. What I would be slightly nuanced on that. I think it is a good idea but if you put say €1,000 into someone bank account there is no guarantee. Number one they're gonna spend and they may save us some will save. Number two, there is no guarantee that the money will remain within the domestic economy and help those domestic businesses most in need of help. So, I think some sort of voucher scheme would be more effective. So, in other words, you give people vouchers that they have to spend in the domestic economy within a specified period of time, perhaps six months. So that would ensure number one that the money gets spent and number two, that the money remains within the domestic economy. So, you know, it’s like I say a slightly nuanced view on David’s view about helicopter money, but I fundamentally think, for the businesses most adversely affected it definitely would help the longer-term survival for those businesses that are still around.
00:26:00 John Deehan
Okay, so we do the same end ultimately, is what's you’re both saying. You've mentioned, again and David has touched on this, the whole area of vaccines. So, we know we now know we have we have vaccines is becoming more widely available. It is encouraging is that really the game changer. I suppose accessible rolled out a vaccine programme both in Ireland and further afield?
00:26:25 Jim Power
I think it absolutely is, John, there's no doubt about that. Because as long as this virus is around, it is going to continue to flow in terms of its impact. And in terms of its relevance, and you know, governments will react in different ways in different countries. And, you know, I would have been quite critical of a lot of our government policy in relation to restrictions since last March. But at the end of the day, I think it is impossible to turn around and say until this thing has passed and that some countries are doing it well, others are not doing it well because you know, countries that look like heroes. One day, three weeks later, you know, their situation seriously deteriorated. So, every country has really, really struggled with controlling the virus, and the ones that have been most successful, I think are those that have the most authoritarian societies.
So, for China, for example, very easy to shut down China and prevent people from leaving their houses, because it's a centrally planned economy. Whereas if you look at more libertarian societies, Europe to some extent but definitely the United States. It is much more difficult to impose the sorts of restrictions that are necessary. So, but in terms what ends all of this, it is undoubtedly the rollout of a safe and effective vaccine programme and one of the concerns that the medical people and the scientists would have at the moment that the virus is mutating. We've seen a number of different strains and have the South African, the UK variety. There is a Brazilian variety now that is starting to appear, a couple cases of that in Japan in the last couple of days. So, the question then is, will the vaccines be capable of dealing with mutations viruses? So, I presume the scientific view at the moment is probably yes, but not certainly. The Pfizer vaccine and BioNTech which is based on mRNA technology. I remember back sometime last year when that virus was initially developed and approved the view from the developers was that it is based on technology, and that they can tweak the technology over a week or two, in order to deal with mutation strains of virus. So, if that's the case, the mRNA technology is incredibly important, and it will deliver a solution but ultimately, you know, we are going to have to watch how the vaccine programme is rolled out and how effective it is in dealing with mutating virus. So, there's some uncertain there but definitely John, the delivery of a safe and effective vaccine would represent a significant game changer. And as David said, you would certainly see the crack economies emerge once we pass that point. Hopefully we do.
00:29:36 John Deehan
Ok we certainly embrace the fact that there's vaccines available. We know we had Luke O'Neill on these webinars previously, he's been very positive about technology in general but turning you David and I know in some of your recent podcasts, you've highlighted vaccine rollout problems and delays are the key downside risks so suppose both here domestically and internationally. Has your thinking changed now that we're seeing more vaccines are going to come into the country and come in stream?
00:30:02 David McWilliams
I mean, certainly here we've got off to a very very slow start and that I think, has injected a certain amount of nervousness within Irish people because we know that in general, as a country, we're not that good at public sector organisation. Ironically, and this is the odd thing is that our entire multinational model is based on supply chain management. So, in the private sector, probably more supply chain managers in this country than any other country per 100,000 of population. The vaccine is a supply chain issue and Jim were saying is Mrs. from Limerick, my missus is from Co. Down, north county Down just outside Belfast.
My mother-in-law has already been vaccinated in Belfast and going for a second vaccination on the 21st of January. Her best mate has also been vaccinated in a church hall not even in a GPs surgery. My mother who is the same age living in Dublin has no idea when the vaccines is coming, who is given it to her, where it's going to be, how does she access it. So, in terms of the very elderly, what they want is peace of mind more than the anything else, John, right that the vaccine is coming and there is there is light at the end of the tunnel. But when I contrast experience of my northern relations with my own family here in Dublin and I see a deep deep lack of urgency on the part of the HSE, that of course annoys me more than anything else. Then you contrast us with a country like Denmark, for example, which is in the same EU wide thinking fund when it comes to accessing vaccines, they are up about 60 or 60 to 70,000 already and then of course I did a long interview with an old friend of mine, an Israel friend of mine. And we also know that Israelis have rolled out a great vaccine programme. We know the Israelis and Pfizer sat down and said, he said we will be the guinea pigs for this sort of different way of thinking about it. Again, we could have done that. Jim mentioned at the very top of the programme, at the top of the show the presence of the pharmaceutical sector in around Cork, we have every right to have a hand in those discussions with the pharmaceutical industry because they and us have been bantering with each other on economic and production side for what 25 years, but we didn't. So that I think has the potential to really piss people off. If HSC do not get the finger and I’ll ask anybody who is listening, go the HSE website now. Just Google in where I get the vaccine in Ireland, what will pop up is a HSE page and there is absolutely no detail of who is going to give you a call, where it is going to be, how you're going to get, what age you have to be, what is the cut off. So, John that I believe is an application of responsibility. And I think it's all very well similar all in this together. But there'll be some moments where the state has to deliver some basic ideas. The first is the protection of the citizen. Okay, that's the first thing which you asked the state to do any time of crisis, protect the citizens. The health services are trying to do this now. We're trying to respond with a lockdown but all diseases or a combination, I would say. We all know, prevention and cure, the prevention is the lockdown. And what we've talked about here is various different ways in which you can actually protect those sectors that are most exposed. Protect those section that I would call skin in the game, people don't wake up on a Monday morning thinking, how am I going to make crust I have no customers and no business protect them. The cure side of course is the other side of disease management and that's the vaccine and my sense is, and it comes back to this idea of urgency. People want urgency, people want the state to react as if their life depends on it. And in many cases, in particular the vaccine. So, if you ask your elderly parents, people on the call, have they got a call from anyone, but do they know anything? So, I think that's a big problem. And maybe we'll get together maybe overtime, the wheels will get into motion. But it seems to mean John that at the moment. Given that we lock down I think 12th March or the 13rd March last year. From that day there was only two things they needed to do was get more ICU beds in the event of a spike. The second is organised the vaccine which is going to come in. Think about all that is all the state was asked to do. In terms of urgency and doesn't look to me like a plan was sitting in Stephen Donnelly interest for the day Pfizer phoned the world and went on online and said we have a vaccine and that seems to me to be, not so much unforgiveable, that is far too hard a word as it is a crisis, and it was a difficult time but seems to me to be a vicious oversight.
One more thing, Ireland as an economy to do well called the reputation game, right. Our brand as a place to do business is entirely dependent on our reputation, is this a good place to live, is this a society we can live in, is this the place I want to put my money, is this a place I want to come and live etc. If we screw up on the vaccine and the problem now is that the world is watching everybody because everybody's got access to who is doing what. Okay. I think there will be severe and reputational damage to Ireland as a proper country. If we don’t get this right. So, mistakes are not just about the health and the immediate issue, they are about the long-term position and brand of the country. And I think we're going to look at that very carefully.
00:36:17 John Deehan
I'm going to take your points, David, well made and look I suppose we always look for optimisation, which is encouraging to see that the numbers are going up now, the number of people in vaccinated but clearly it would be nice for somebody to be able to go on and say when am I in the queue? And I think all of us, it's incumbent on us to talk to our representatives and push for that, you know, the more we raise our voices, the more hopefully we get a response. I wanted to turn to another area now if I could, we've made it this far without saying a lot about our friends across the water. But maybe coming to you first on this Jim. So, the whole issue of Brexit was Brexit a good deal in the end for the UK and what does a post Brexit UK look like?
00:36:58 Jim Power
Ok, I don't think the Brexit outcome achieved on Christmas Eve is good for anybody. It's not good for the UK. It’s not good for Ireland. It’s not good for the European Union. And I believe from day one that Brexit was a lose lose situation. From a UK perspective, they have walked away from free access to a market of whatever over 400 million people okay. They, they okay, that the agreement that was reached covers goods only and you know, tariffs and quotas under a WTO regime have been avoided, which is good news for everybody. But at the end of the day, the ability of the UK to trade and goods with other EU countries has been damaged and has been made more difficult by the Brexit deal that was agreed. Okay. And secondly, the Brexit deal does not cover services particularly financial services, which is an incredibly important part of the south east economy in the UK. And what's gonna happen now is over the coming days and weeks we will see the UK sitting down and negotiating services, particularly financial services to see if there is some sort of trade deal can be arranged there. In fact, it's going to be the future now of the UK/EU relationship is just going to be an ongoing series of ongoing negotiations, a little bit like the relationship between the EU and Switzerland over the last couple of decades. So, it's a sort of a never-ending story as such. So, in a nutshell, no, I don't believe the Brexit deal is a good one for the UK economy. And they now face the challenge of trying to create what they self-describe as a global Britain. That is going to be difficult. There's no doubt about that. You didn't ask me about the Irish impact, but I would say for Ireland. Obviously, it's going to complicate the relationship with a very important trading partner. But I think what we have now got to do in Ireland is to grow up and recognise that you're we're in the European Union, for the first time in our lives without United Kingdom we have to deal with that and more importantly, we have to try and exploit the opportunities that will arise from that in terms of import substitution, in terms of attracting foreign direct investment and so on. So, there are certain upsides for Ireland from the whole process. I don't believe those upsides some time will upset the downside for at least there is an opportunity here now that Ireland have got to grasp.
00:39:55 John Deehan
David if I can come to you. I know in the past some of these events you both talked about how we in Ireland you know, we can become very attractive, almost by just staying sane. And you know, if people want to trade with us. Does Brexit from your perspective now look good from Irish point of view?
00:40:02 David McWilliams
John, John, John the UK is a basket case now, right. It has been taken over by ridiculous ridiculous people, who have no grasp of history, let along economics and their view on futurology and if they had one is on a world that doesn’t exist. So basically, I feel sorry for the Brits at this stage. Because they have been sold a total pup, they can go back to a nostalgic view of Britain that may well have been the case 100 years ago, but 100 years ago they were ruling the ways rather than waving the rules. So, that is the first thing. So, I think Britain will continue to make the very very bad elementary schoolboy errors when it comes to economics and politics, which is in total tragedy because a lot of people on the call I've worked for, guts of a decade in London etc. And have a lot of English friends. I want to say English in England because this is an England project. I think the most significant ramifications is going to be geopolitical which is the breakup of the United Kingdom. I think nothing now is going to stop Scottish independence. Scottish independence is baked into the numbers, and by that, I mean if you look at the polls in Scotland, everybody under the age of 50, is overwhelmingly pro-independence. And the only area where you get unionism of having some significant polls on the population is the over 65s. Between 50 and 65 is kind of mixed. So, Scotland will go independent it's just a matter of when and how they do it, how the Tory party fights a rear-guard action but my own sense that it is in his DNA Boris Johnson is not that attached to having Scotland continuing snipe at him. We also would like to be the Tory leader forever. If you're a Tory and you get rid of Scotland, you ineffectively get rid the threat of Labour. Okay, so the chances the Tories party becoming in power in the government for a long time under this nationalist thing called Brexit is quite high. Scots go independent and the plot ticks up in Northern Ireland. This for us is the long game and we have to get our heads around. What happens when, not an if, is when the majority in Northern Ireland tips over into a nationalist majority. What sort of set of consequences do we have to deal with? So, I come back to the point about urgency, you know, and this is the point I am trying to hammer down in all this conversation. It is very incumbent on us to inject a certain amount of urgency into the opportunities that Jim suggested. The opportunity is very clear. I always thought the Brexit deal will be very good deal for us, in short term economics. Because let's look at things in a rose tinted. We are in competition for services, investments and employment with the UK. We are in competition for companies to come here. We are in competition with UK in various areas. The fact that they've made very bad decisions, can only give us an opportunity to grasp. So, for example, if you think about Ireland, what is our economic model. Okay, our economic outwardly facing model we trying to become like a handily port in the Middle Ages or like Shanghai just before the Second World War, or like Venice, like a city state, a trading city state, you make yourself open, your attracting capital. Your own workforce, and your own people, benefit from that. You bring in skills, talent elsewhere, you make stuff here, you use tax arbitrage, and you generate value added, that is our modal, right.
The Brits have turned their back on that modal, in spite of what they talk about global Britain. If you turn your back on your biggest trading partners, you have in effect walked away from free trade and the concept of the free movement of the people and the cost of ideas. So huge opportunity for us but only an opportunity because we need to create such a robust economy and society here in order to deal with the unification project, which is now in trade. I have no idea how that's going to go. But I do know that it's only going to go well for us if we are strong, resourceful, muscular in our negotiations, and we have the fiscal and monetary capacity to absorb in what will be in affect a problem child. So, I think the stakes are very, very high presently so Brexit has kicked off a whole process, which is much more interesting from the political and historic perspective than just the short term of economic trends in the world. But the short term economics will might do well at it.
00:45:30 John Deehan
Okay, so again, I think it's gonna run along with both challenges and opportunity on the Brexit front. Just jumping across to the Atlantic in the short time we have left. I do want to get your views in terms of the US, but who would have thought last week, and we are watching TV and see the Capitol building being storm by a mob wearing racoon hats, bear skins very, very alarming but given everything we've seen in the last number of months there. Did that surprise you? Donald Trump's was a challenge to the election. And maybe I'll come to you for you on the US David?
00:46:02 David McWilliams
Did it surprise me? Ye it did actually. Thought the Jamiroquai character was particularly ace, I quite liked him. Challenging his inner return of the space cowboy and I realised now, quite funny he lives with his mammy which is quite funny. Revolutions in the old days were like Che Guevara and Fidel, proper lads, ok. You wouldn’t come near or Lennon who was quoted at the top of the show. This guy living with his mammy demanding organic foods in the USA state penitentiary, I say good luck with that my friend, but it is very, very clear that the United States is at an unbelievably strange complex point, large experiments going on in the United States. The following is an experiment whereby the Republican Party become the party of the workers and the Democratic Party become the party of the elite. That has never ever happened before. The left-wing party of the Democrats which use to be the party of Labour, blue collar unions are now the party of wall street, Hollywood and Silicon Valley. Okay, they're the parties of those people that have master's degrees and more people who read for the New York Times. Such magazines with a sort of a rights on PC elements which hoover up lots and lots of younger people. In the background, you know, people like Bernie who people know me well know I’m close to Bernie. I’m in the institute called the Saunders institute. I'm on the board of that so I know they're thinking those more left-wing Democrats are kind of isolationist, even though they have the young vote. But the interesting that the Republicans are now the party of the working man. That is the extraordinary thing as the Republicans where the party with power and money. So, Trump, so I think Trump is gone. I don’t think Trumpism doesn’t go away. A lot of people are talking about Trump and Trumpism. There was Trumpism before Trump, but it wasn’t the guys of Trump.
Then you say what can Joe Biden do now, but this is not because I am closer to Bernie and know him well but when I look at Joe Biden’s cabinet. I basically see Clinton or a more cosmopolitan version Clinton’s cabinet or Obama's cabinet.
So, I see people who I’m are not sure have any real incentive to try and get to the root of the problem of inequality in the United States and the inequality problem of the United States is we know is deep and we know he is destroying the lives hundreds and millions of Americans. Can Joe Biden do, what you have to is to tax very rich people and tax wall street, he will have to tax, do something like a warrany on it. If I only send the signal that he is serious about trying to reduce inequality. I think Biden will be failure and I don't say this lightly and I also don’t say it will any enthusiasm. Unless they go and try and do a Roosevelt. I mean FDR, Franklin Delano Roosevelt in his first couple of months he did things that no one could imagine and changed America. He took them of the gold standard. Totally change how they run monthly policy. Introduce minimum wages, introduce public works, he was regarded as a Communist by the Republican party. Yet he probably the American president who has the greatest legacy and if Biden were to do that it would be extraordinary and it would actually help to maybe stop the Trumpism surge but if he doesn’t do that I think our friend Jamiroquai is only the first of many.
00:50:10 John Deehan
Well we hope that is not the case and maybe Biden will be at least the safer in hand to calm the states.
00:50:18 David McWilliams
John if I could just interrupt you, you don’t need a safe pair of hands now, you actually need someone who says we have serious society problem and we need to fix it.
00:50:33 John Deehan
Okay. Jim, I just want to get your view. Just maybe briefly. I'm conscious we're coming close on time, or at least some time for questions, but just the Biden in terms of Ireland. I saw this interesting not long after he was elected. He was asked for comment by the BBC. And his comment was I'm Irish, which took to be somewhat encouraging but taking that out of it. It would be positive on Biden in terms of what you were meant for Ireland and going forward.
00:50:55 Jim Power
Well, I certainly be more positive on Biden than another four years of Donald Trump. I'm inclined to agree with David. I suspect Biden is not going to change the world because he doesn't have the FDR motivation or energy and so on or vision, indeed. However, I think it does, actually, hopefully, stop a very damaging trend that Trump was creating as a global level. So, in terms of Biden and Ireland. Biden has a strong Irish heritage he processes a hurler in his office. He has strong opinions on county Mayo. Putting that to the side. I think Biden will be good for internationalism, you know he will try and rebuild some of the damage or undo some of the damage that Trump did in terms of the relationship between the United States and Europe, because Biden grew up on foreign policy that his pedigree foreign relations, so I think he will try and build a bridge between the United States and Europe. I think his attitude to China will not change very much from Trump, because there's a lot of popular support for the sort of aggressive stance that Trump took towards China. And I think Biden will continue with that. I think it should, it should certainly if Biden delivers the increase in corporation tax that he says in his manifesto, he was going to do to take corporation tax rate back up to 28%. That would definitely benefit foreign direct investment from US companies in Ireland. So, I think net net, Biden would represent better news for Ireland than if we got another four years of Trump. So, I'm relatively optimistic but I to totally accept David's view that Biden is not a revolutionary. He's not going to change the world in the manner that FDR did but it does arrest something really negative that has been developing over the last four years.
00:53:04 John Deehan
I want to thank Jim and David for their insights. I trust you have found it really informative I knew I certainly have. Stay safe. Bye for now.
00:53:22 Video ends
The economic performance of different countries in 2020 was heavily driven by the path of the virus; the structure of the economy, with those countries with a heavy dependence on tourism most adversely affected; and the manner in which the authorities restricted economic and social activity. It is still too early to reach any definitive conclusions about which countries handled the virus best, because the relative performance of different countries has ebbed and flowed. It is probably the case that more authoritarian regimes like China, found it easier to shut down economies and societies, than more libertarian countries like the United States. Even within the United States, the performance from state to state varied. Likewise, across the EU. Other countries such as South Korea and Taiwan had more experience of dealing with such a health crisis, and to date have coped better.
THE PROSPECTS FOR 2021
As we move into 2021, there are grounds for greater optimism, once we get through what will be a difficult first quarter as serious restrictions have been put in place to deal with the latest surge in virus infection rates.
Notwithstanding the basis for optimism, the level of uncertainty about the future is still very high. There is no doubt that the outlook for the global economy will be primarily dictated by the path of the virus, and the likelihood of a successful global rollout of safe and effective vaccines. The new strains of the virus that was highlighted in the days leading up to Christmas is obviously a source of concern.
The speed at which the various vaccines are being developed and approved is very impressive. The hope is that the new strain, or indeed any subsequent mutations, will be susceptible to the various vaccines that are being delivered. The early indications are positive in that regard.
If the virus is gradually brought under control in the first half of 2021, the world economy is likely to experience a significant rebound in business investment, global trade, consumer spending, and international travel. In other words, the economic activity that has been artificially put-on hold since the early part of 2020, could rebound very quickly. There is undoubtedly a high level of pent-up or dormant demand in the global economy – it just needs an excuse to be released.
As we ended 2020 and entered the new year, serious restrictions were being re-imposed all over the world, and this is likely to remain a recurring theme until the vaccines are safely and effectively delivered in sufficient quantities. In other words, the early months of 2021 could be very challenging and uncertain. The various vaccines represent a source of optimism, but there are still considerable grounds for uncertainty, and there is still some distance to go.
Another source of optimism in 2021 is the fact that the very divisive President Trump will be replaced by Joe Biden on 20th January. The platform on which Biden built his 2020 election campaign was titled ‘Build Back Better’. This basically revolves around fostering economic recovery; improving infrastructure; bringing broader benefits to lower income communities and minorities; improving education, increase spending on R&D, and the skills of the workforce; and creating a greener economy and society. If delivered, this would be a very positive agenda for the US economy and its very divided and unequal society.
Of perhaps greater relevance is the fact that Biden is likely to have a much more global and internationalist perspective. He is likely to adopt a much more positive approach to global international relations, and particularly to seek to rebuild the somewhat damaged relationship between the US and the EU. The future relationship with China is a different matter, because the more confrontational approach Trump adopted towards China has understandably a high level of popular and political support within the US. One way or another, President Biden is likely to represent relatively good news for global co-operation, global trade, and multilateralism. In addition, he is likely to get the US to re-engage with the climate change agenda, which is absolutely essential.
Notwithstanding the uncertainty around the immediate path of the virus, and the uncertainties around the various vaccines, there are grounds for hope that from a global perspective, 2021 will be a better year. Just before Christmas, the Organisation for Economic Co-operation and Development (OECD) forecast that the global economy would grow by 4.2% in 2021, having contracted by a similar margin in 2020. Basically, the hope is that by the end of 2021, the global economy will be close to where it was prior to the health crisis. This would represent a very good outturn.
THE POLICY ENVIRONMENT
On the policy front, one of the potential challenges for policy makers is that if there is a relatively strong rebound in global economic activity later in 2021, and given all of the stimulus that has been injected into the global economic and financial system through very expansionary fiscal policy; aggressive Quantitative Easing (QE); and zero or near-zero official interest rates almost everywhere; inflation could start to pick up.
However, in an environment where Governments everywhere are borrowing and running up significant budget deficits and debt, it is essential that long and short-term borrowing costs are kept as low as possible for as long as possible. In terms of debt sustainability, the last thing the world needs is any uptick in borrowing costs. Central banks will just have to suck it up and accept a bit of much-needed inflation. Whatever way one looks at it, COVID-19 has been deflationary rather than inflationary, and so policy accommodation will be required for the foreseeable future.
It is reassuring that policy makers everywhere seem to recognise that policy will have to remain very accommodative throughout 2021. The Federal Reserve and the ECB have committed to ongoing significant monetary support. On the fiscal side there is still no suggestion virtually anywhere that the time to start restricting fiscal policy is appropriate or near. Indeed, just before Christmas the US Senate voted overwhelmingly to approve a fiscal stimulus package of almost $900 billion (€745 billion), which is the second largest economic relief bill in US history. The biggest was in March. This sort of fiscal reaction is common to many countries around the world, and will have to continue. It represents a totally appropriate counter-cyclical fiscal policy. Many countries will build up significant levels of deficit and debt, but there is no choice in the circumstances. Getting sustainable economic growth back on track as quickly as possible represents the most effective way of bringing public finances back under control. Fiscal austerity must not become a policy option.
2020 was a roller-coaster year for markets. When COVID-19 was declared a global pandemic in early March, panic ensued briefly and markets fell very heavily in the first half of the month. Then in the third week, markets bottomed out and subsequently made very strong gains.
There have been 27 Bear Markets since the late 1800s, with an average decline of 38 per cent, and once they bottomed out, it took an average of 60 months to reach new highs. Global markets fell by 34 per cent from February into March, but it took just 5 months to hit a record high. As an example of the extent of the rebound, the MSCI Global Index gained 12.2% in November, which is its best month on record.
During 2020, the S&P index gained 14.7%; the German DAX gained 2.5%; the Japanese NIKKEI gained 18.3%; the ISEQ gained 3%; and the UK FTSE 100 lost 15%.
In the circumstances that prevailed during 2020, these market outturns are impressive, with the notable exception of the UK market, which was affected by Brexit uncertainty. The strong performance of global markets has continued into 2021.
The equity market performance has been driven by the aggressive fiscal policy response from governments, and the monetary policy response from central banks, which entailed aggressive quantitative (QE) and historically low official interest rates. In addition, money was easy to borrow and was put into stocks.
In an environment of historically low short and long-term interest rates – which looks set to persist for the foreseeable future – investors are being pushed into equity markets by default. There are few other worthwhile investment options.
The UK exited the EU transition mechanism on 31st December 2020, thereby formally leaving behind the Single European Market trading environment. Thankfully, on 24th December, a trade deal of sorts was agreed between the EU and the UK, which avoided the so-called ‘hard Brexit’, and the imposition of a WTO tariff regime that would have ensued in the event of no deal being agreed.
While the most negative ‘hard Brexit’ scenario was avoided, it must be recognised that the ‘bare bones’ trade deal agreed will still have significant implications for Ireland’s trade relationship with the UK market, which is vital for indigenous Irish SMEs in particular.
The deal agreed relates to goods, with the consequence that tariffs or quotas will not apply to trade in goods between the EU and the UK. However, the UK decision to leave the single market and the customs union, will necessitate border, customs, rules-of-origin, and veterinary checks and controls that will cause delays and increased bureaucracy, and will increase the cost of trade. In addition, the deal does not cover services to any extent.
The UK is now gone from the EU, but the future will be characterised by negotiations and haggling in relation to many aspects of relations between the EU and the UK, which is pretty much the situation between the EU and Switzerland. This implies significant uncertainty ahead on many aspects of the relationship between the EU and the UK.
Brexit as delivered is not good news for Ireland, the EU or the UK, but it could have been considerably worse.
THE IRISH ECONOMY
ECONOMIC PERFORMANCE IN 2020
2020 was a very strange year for the Irish economy. In the first nine months of the year, gross domestic product expanded by 3%, and it looks set to be one of only a very few countries globally that is set to deliver positive growth. However, as is always the case, GDP needs to be treated with extreme caution in an Irish context.
Ireland in 2020 was very much a story of two economies. The FDI part of the economy continued to perform very strongly. Exports of Chemicals and Pharmaceuticals expanded by 11.9% in the first 10 months of the year, and accounted for almost 66% of total merchandise exports. This sector along with other parts of the multinational sector provided a very solid base for economic growth, employment, and the public finances.
At a more general level, if one works in the FDI sector, the public sector, professional services, or financial services, then 2020 was a relatively good year financially. However, if one is involved in accommodation and food services, non-essential retail, personal services, or any tourism related activity, then 2020 was a very difficult year.
At the end of December, the total number of persons on the Live Register or Pandemic Unemployment Payment stood at 517,347. This will increase in January as the more stringent Level 5 restrictions impact across many sectors of the economy. This is indicative of the challenge facing policy makers over the coming months in dealing with the stringent restrictions, and later on in trying to restore normality to the labour market.
THE PUBLIC FINANCES
The COVID-19 crisis had a serious impact on the public finances in 2020. An Exchequer deficit of €12.3 billion was recorded for the full year, which is a deterioration of €13 billion on the previous year. Total gross voted Government expenditure increased by 26.5%, with health and social protection growing very strongly.
On the revenue side, taxation held up very well in difficult circumstances. Overall tax revenues were down by just 3.6%. The multi-national corporation tax take was very strong, with the overall tax take from the corporate sector increasing by 8.7%. VAT declined by a large 17.8%, reflecting the impact on overall consumer spending. Income tax held up remarkably well, with a decline of just 1%. Given the sharp increase in unemployment as a result of COVID, the income tax take is very resilient. This reflects the fact that lower paid workers in sectors such as accommodation and retail were worst affected by the crisis. On the other hand, workers in sectors such as the FDI sector, the public sector, financial services, and professional services continued to deliver strong earnings during the crisis. In addition, the pandemic payments to employers in respect of employees supported the labour market.
For the full year 2020, the Department of Finance is projecting a General Government Deficit of around €19 billion, equivalent to around 5.5% of GDP. At the beginning of 2020, the Department of Finance was projecting a General Government surplus of around €2.5 billion. COVID-19 has had and continues to have a dramatic impact on the public finances. However, there is nothing that can be done about this, as it is essential that households and businesses are given as much financial support as possible during these extraordinary times, and that spending on health is ramped up as required.
Tax Revenues 2020
% OF TOTAL
Capital Gains Tax
|Source: Department of Finance, Fiscal Monitor, Jan 5th 2021.|
Notwithstanding the current stringent restrictions in place, there are grounds for optimism about Ireland’s economic prospects later in 2021. Much of this optimism is obviously contingent on a successful rollout of the vaccine programme.Jim Power, Economist
THE YEAR AHEAD
Looking ahead to 2021, it is possible to be optimistic, subject of course to all of the same caveats about the mutating virus and the vaccines. The very stringent restrictions in place in January, which could last well into the first quarter, will obviously have a very significant impact on economic activity. There is not a lot that can be done about that. It is necessary to bring infection levels down, but Government will have to continue to provide strong financial support to households and businesses for the foreseeable future. The hope is that an effective vaccine programme will be rolled out as quickly and efficiently as possible, and restore some semblance of normality to the economy and society in the second half of the year.
One of the interesting features of the Irish economy in 2020 was that in the first 11 months of the year, household savings increased by €13.1 billion to reach a record high of almost €123.6 billion. At some stage, most probably later in 2021, much of these savings will be unleashed in the economy, along with pent-up business investment. This should set the scene for a decent rebound in the economy.
The multi-national segment of the economy is also a source of optimism. The end-year results from the IDA show that IDA supported companies increased net employment by 8,944 during 2020 to reach 257,394 jobs in the FDI component of the economy. This is really important in the current challenging environment.
Notwithstanding the current stringent restrictions in place, there are grounds for optimism about Ireland’s economic prospects later in 2021. Much of this optimism is obviously contingent on a successful rollout of the vaccine programme. We will also have to mindful of the Brexit impact, and the fact that it will take some time for tourism-related activities to recover. Businesses in these areas will need to get as much ongoing financial support as possible. Apart from the evolving COVID-19 situation and the implications for the health service, housing is likely to dominate political discourse, as it should.
The views expressed in this article reflect those of Jim Power and are for informational purposes only. They do not represent the views of Aviva. Jim Power’s views may change.