The Business Environment for Growth in 2018 Declan Jordan Director, Spatial and Regional Economic Research Centre Senior Lecturer in Economics
Is it a time for pessimism or optimism? • My presentation may seem pessimistic (I am an economist after all) • My outlook is optimistic (I have confidence in Irish business) • There are positive signs of growth and recovery • There are substantial risks
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Unemployment Rates in Key Markets 10.0 12.0 14.0 0.0 2.0 4.0 6.0 8.0 2006M01 2006M05 2006M09 2007M01 2007M05 2007M09 2008M01 2008M05 2008M09 2009M01 9 2009M05 2009M09 2010M01 2010M05 2010M09 2011M01 2011M05 2011M09 2012M01 2012M05 2012M09 2013M01 2013M05 2013M09 2014M01 2014M05 2014M09 2015M01 2015M05 2015M09 2016M01 2016M05 2016M09 2017M01 2017M05 2017M09 United States United Kingdom European Union (27 countries) Euro area (19 countries)
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Interest Rates
Interest rates • No room for more downside. • Upward pressures emerging but not strong yet. 14
Potential Outcomes of Brexit • It is impossible at this stage to know which model (Norwegian, Swiss, Turkish, Canadian, Free Trade, WTO) is most likely. • And there is another possible outcome, which is a second referendum with the UK voting to remain. • Ireland is one of 27 negotiating with the UK – Irish interests will be subject to the interests of the EU • Ireland’s, and Irish businesses’, dominant strategy is to expect the worst outcome and this means growing markets elsewhere, or targeting a premium product strategy for the UK.
What outcome is likely? • This is a negotiation. • In it, politics is as important as economics. If it wasn’t Brexit would not be happening. • For businesses, the official advice is to follow the logic – all sides will want a deal and will act in their own interests. – But….....
Exports of Goods & Services to the UK (as % of GDP) in 2014 Source: Institute of International & European Affairs 2016
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The FX risk presented by Brexit • Remember that FX brings transaction and translation exposure – but also strategic/competitive exposures • Forward rates for EUR/GBP in 6m 0.8860; 9m 0.8888; 12m 0.8909 • Hedging a large portion now only makes sense if the rate is critical for projects to break-even. Too much uncertainty otherwise. • Alternative strategies make sense - participating forwards and options • Know your break-even rates – hedge on a build basis. Watch for the longer play – build hedging and avoid a ‘cliff’ when no longer fixed. • Can you restructure receivables or create liabilities in Sterling to achieve a natural hedge? 22
Other risks Instability Tax Business as usual 23
Conclusion • The Irish economy has recovered – all indicators pointing to further growth in economic activity • Euro and US economies also look to remain strong or grow stronger • Brexit is the source of risk – FX transaction/translation exposure – FX competitive exposure • Look for alternative relationships between the EU and ‘third countries’ as a guide to potential outcomes • It is hard to see how Ireland’s ‘special status’ can be put into practice – we will have an EU border on the island and there are 26 other countries that have demonstrated they put national interests first • A hard Brexit is most damaging to Ireland based on our current trade structures – but this assumes business and economies are static • Businesses and economies are not passive and not static • Prepare for a hard Brexit – know what WTO tariffs your goods will face
Thank you for your attention. d.jordan@ucc.ie @decjordan
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