July 8, 2013
Did you ever see a jockey riding two stray horses at the end of a race? I’ve always been amazed at the ease with which an experienced jockey can get the two animals trotting along at the same time. However, woe betide the poor jockey’s nether regions if the two horses decide to head off in separate directions. Now imagine a jockey trying to straddle three horses?
The Irish economy is a bit like a jockey trying to straddle three horses. We need all horses running in the same direction and, broadly, at the same pace, for our policy mix to deliver the best outcome for our people.
The first horse is the British economic horse. This horse is by far the most important trading partner in terms of both employment and actual trade. By actual trade, I mean the labour-intensive trade that gives hundreds of thousands of people a living – agriculture, tourism and retail.
The second horse is the European, or German, economic horse. This horse is crucially important from a policy point of view, because its performance dictates our level of interest rates.
For a highly indebted population like ours, the German horse exerts far more influence than it would do if its influence were based on how many people are dependent on trade with Germany for their living. That figure is small – not derisory, but small – and yet the German influence on Ireland is huge.
The third horse is the American horse. The US is – on paper at least – Ireland’s biggest trading partner. This figure refers to the hugely capital-intensive, tax-sensitive multinational sector. Multinationals account for 90 per cent of our recorded exports, but less than 7 per cent of our actual employment.
American companies are why Ireland’s economic figures flatter to deceive. Without them, we’d be Croatia in the rain – a country with no real domestic industry bar food and tourists – the standard staple of the economically underdeveloped.
It is not hard to see why we need the third horse, the American one.
For the jockey (ie, Ireland), the best outcome is when all three horses are moving more or less in the same direction. When they head off in opposite directions, even having an Irish neck like the jockey’s proverbial you-know-what can’t help.
Last week, we got indications of where our three crucial horses are headed.
There was so much relevant economic data published during the week, it is difficult to know where to start. But let’s kick off with the big trends. If the numbers and the policy response unveiled last week become a trend, the main players in the global economy – our horses – are now poised to head off in very different directions.
This global divergence will have enormous ramifications for the Irish economy.
First, let’s see which way the horses are running.
In the US, the economy appears to be coming back to life, after years in the recovery ward. Unemployment figures published last Friday indicate that finally the chances of getting a job in America are improving. This caused a commotion in the financial markets, which were already spooked by the Federal Reserve’s indication that it will “taper off” its massive money-printing experiment.
Long-term interest rates rose dramatically on Friday. This is because many now think that the recovery will be strong enough to let the Fed ease up big time on printing money. Interestingly, this is what the Fed wants. After all wasn’t that what all the money printing was supposed to do?
It was supposed to kickstart the anaemic economy into life, and this would eventually be seen in fewer Americans kicking around with nothing to do all day. We are still a long way off from a victory for the Fed, but the financial markets seem to think that the Fed will win this one, unemployment will fall, and the Fed will take its foot off the printing accelerator. If the US manages to achieve this smooth lift-off, Ben Bernanke will join Pope John Paul II in the priority-boarding queue for sainthood.
So the odds are now on a US recovery: delayed, fitful, but a recovery nonetheless. This will send the dollar up and the US bond market down. A strong dollar always makes dollar investments in countries like Ireland more attractive. Good news for us.
Now let’s look at our first horse, the British mare.
The British broke with tradition last year by employing the Irish-Canadian Mark Carney as the Bank of England governor, which shows (among other things) how far the Irish of Gross Isle in Montreal have come over the years.
In his first outing as Bank of England governor last Thursday, Carney made it clear that the change at Threadneedle Street was more than cosmetic. Carney’s first move was to tell the world what his team was thinking.
“In the Committee’s view, the implied rise in the expected future path of Bank rates was not warranted by the recent developments in the domestic economy.”
This is a huge departure in terms of style – but also of substance. Carney is saying the British economy is still very weak, and that it will not be torpedoed by higher interest rates.
He is saying to the financial markets: chill out, there is plenty of time for rate rises, so at the moment let’s keep the patient in the convalescent ward. Again, good news for Ireland.
What about our third horse, the European or German nag? Well, here again, we had a significant policy shift from the ECB on Thursday. Following Carney’s straightforward statement about the British economy on Thursday, Mario Draghi went one better, saying that the eurozone would not see any rate rises for the foreseeable future.
This is hardly surprising, given the endemic weakness of the periphery and the political crisis in Portugal. However, what is different is that the central bankers are projecting forward and stating that they see weakness for some time to come in Europe; and, more importantly, that they will do what Bernanke did in the US and use all the tools in the monetary toolbox to stave off depression.
What does this mean for Ireland? It means that there will be absolutely no interest rate rises for some time. This must give huge relief to the thousands who are just about breathing, despite enormous debts.
Regular readers will know that I don’t believe that their debts should be, or will be, paid -but, ahead of that natural debt deal, this is at least a bit of breathing space.
As for Britain being kept on the monetary life-support system, this again can only help Irish agriculture and tourism dependent as we are on the whims of the English consumer.
Finally, if the dollar were to rise, as I expect it to do, multinational profits when translated into dollars will go up. If this makes a 50-50 decision to invest here or not more likely to fall in our favour, then this too is a small bit of supportive news.
While all this suggests that the international news has been a little bit helpful during the week, it also reveals an obvious lack of joined-up thinking in Irish policy when we are in the lap of the gods of three very different economies, and very different policy-making elites.