Posted on Friday 3 January 2020 by Ulster Business
Gareth Hetherington, director of the Ulster University Economic Policy Centre, takes a look forward at the business and politics which we could be facing in one of the most important years of this century
Given the constant 24-hour multi-media news cycle, there is a significant risk that over the last couple of years, we have become anaesthetised to the significance of current events. Locally we have been without a Government for almost three years, nationally the Brexit negotiations have consumed UK parliamentary politics entirely and internationally President Trump is setting about dismantling the US constructed, post-Second World War international order. These are momentous times.
In an inter-connected world, the global economic picture dictates local economic performance and therefore understanding the international context is important in forecasting prospects at home. So, what does 2020 have in store?
Trump gets re-elected – probably
Those looking for a change in personnel in the White House hoping it will bring about a return to ‘normal’ politics in the US could be disappointed. Radical agendas seem to be the order of the day from both the left and the right, so a new President may bring change, but it may be no less extreme. For my part, Trump’s re-election will hinge on the success of the US economy over the next 12 months. If it continues to create jobs and wages continue to grow then he will be re-elected, but if the economy slips into recession then history would suggest he will be a one-term president. In over 50 years, only two US presidents have been unfortunate enough to have the end of their first term in office coincide with a recession – Jimmy Carter and George HW Bush and both were the only one term presidents over that entire period.
In support of the US economy, the Federal Reserve is now back on a monetary easing cycle and the year ahead is likely to see a general trend of lower interest rates across most major economies. That may be sufficient to offset the risk of a global recession.
Brexit ‘gets done’ – but a trade deal will take a little longer
So, the outcome of the UK General Election is a Conservative brought forward a large working majority. On that basis, Boris Johnston’s deal will be passed and the UK will officially leave the EU in January. Obviously, that still leaves the significant task of negotiating a new trade deal and the 11-month time scale seems highly optimistic. However, stories of it taking five to 10 years “because that’s how long the Canada trade deal took to negotiate” may be equally pessimistic.
Two important factors should keep the time scale down. Firstly, the UK and EU starting positions are one of complete alignment, there are no tariffs or trade barriers in place between the two economic entities. Secondly, although negotiations to date have focused on reaching a withdrawal agreement, there have been significant discussions on the future relationship as set out in the economic partnership section of the political declaration. Therefore the UK-EU trade negotiations will be starting much further down the track than other trade negotiations. As an aside, it will be interesting to see if the trade talks will receive as much media coverage as the withdrawal negotiations. I suspect not.
In the less likely scenario of some form of Labour-led coalition, it is difficult to see how (and why) the EU would enter into credible re-negotiations with the UK in the knowledge that a Labour government would not even support its own deal in a second referendum. The most likely conclusion in that scenario is a Remain outcome.
Will we see a return of devolution? Maybe
Turning to the key issue locally, as an optimist, I would like to say that Stormont will be back up and running in 2020, but the realist in me has a nagging doubt. In investment terms, past performance is no guarantee of future returns, but in local political terms, past performance has been a fairly reliable indicator of future behaviour. I have tended to subscribe to the notion that the Executive will only return when the Northern Ireland electorate demand a return through their actions at the ballot box rather than what they say when presented with a microphone by a news journalist.
That said, an increasing sense of crisis in the health service, that requires political decision making to resolve, is creating an environment where the status quo is simply no longer sustainable. Either a return to devolution or direct rule seems increasingly inevitable.
Against that backdrop, Julian Smith the Secretary of State is still travelling over to Belfast when the Tories are ‘in the most important election battle of a generation’. Why? Is a deal in the offing?
The local economy will plod on
This all matters to our local economy, where recent economic performance has been mixed. Northern Ireland GDP growth has been poor and the value of economic activity per hour worked, our productivity, is approximately 15% below the UK average which itself lags behind other large advanced economies. Furthermore, growth in productivity has been broadly flat since the financial crisis and there is little evidence that it will pick up any time soon. This is important because in the long term, improvements in living standards requires rising productivity.
On a much more positive note, the labour market has performed very strongly and many firms are still reporting skills shortages as their biggest risk. Employment levels are at record highs and unemployment correspondingly near record lows. This tightness in the labour market has also resulted in a long awaited return to real growth in wages, which is critically important in supporting consumer spending.
Putting this together, assuming global factors don’t take a turn for the worse, economic growth is likely to continue on its current below trend growth into the medium term.
In addition the labour market should continue to hold up albeit with lower levels of net job creation, but this should be less of an issue with historically low unemployment.
Locally, nationally and internationally we are living through a critical inflection point in the history of the 21st century.
To paraphrase the Chinese curse: we are most definitely living in interesting times.