Over the past few weeks, some readers of this column have been a bit perplexed by my confidence about the economy and why I believe that the basis for this recovery is stronger than at any stage since the mid-1990s, when Ireland truly was experiencing something of a miracle.
Let us examine, ahead of work tomorrow, why there are reasons for guarded optimism. I am not going to cover every single factor that impacts on the Irish economy as that would be way beyond any article; instead I am going to focus on two critical aspects that affect the trajectory of the economy.
The first aspect is what is going on in the United States and the second, less important, observation is what is likely to happen in our local economy.
This article will not be without its own paradoxes. How can we be optimistic about Ireland – one of the world’s most open economies – when world growth is slowing down?
Surely if world trade is slowing, countries that do most trade should slow quickest? I will answer this conundrum in a moment by explaining that these two things can be true at the same time.
Initially, however, let’s examine where the US, the single most important country for us, is in its economic cycle. The US is seven years into an economic cycle that began with near bankruptcy after the collapse of Lehman.
After seven years of zero interest rates, the US has fixed its balance sheet. Given that it experienced a “balance sheet” recession, this outcome is a roaring success. This was exactly what the Fed set out to do in 2008/9.
The rise in rates, two weeks ago, is a valedictory moment. Mission accomplished. Unemployment is down, the budget deficit is down, house prices and asset prices are up and corporate indebtedness is down.
Unfortunately, the only factor that has been absent in this recovery is large-scale corporate investment from large US companies. This is the American paradox.
But the paradox will shift this year and Ireland will be a prime beneficiary.
The seven-year cyclical recovery process in the US will continue for some time. A growing US is always good for Ireland irrespective of what is happening in the rest of the world.
But there is something else going on which plays in our favour. Let me explain that “something else” by leaving the US economic cycle and examining the structure of the US economy. If we tease out the odd structure of the US, it will allow us to understand (a) why the US is different to the rest of the developed world, (b) why Ireland can do well in 2016 and (c) why Ireland can do well even if the rest of the world slows.
The key to all this is exports. Big economies that are dependent on exports produced by domestic companies are in for a fright in 2016.
Consider the structure of the three big economies outside the US: China, Japan and Germany.
Japan used to be a major exporter and exports are now about 18 per cent of GDP. Germany is the world’s fourth largest economy and it exports just under 50 per cent of its GDP.
China, the world’s second biggest economy, exports 26 per cent of its GDP. All these are very vulnerable to the fall in world trade that is happening.
Now think about the contrasting position of the US. It is the producer of nearly a quarter of the world’s GDP yet its export rate is only 13.5 percent of GDP, of which about 40 per cent goes to Canada and Mexico.
What differentiates the United States from the rest of the world is both relatively high domestic consumption and relatively limited exposure to foreign problems.
What is remarkable about the global system is that the United States, which should have a very high dependence on exports given its size, has a very limited one. America is exceptional and isolated.
And as problems rise in the rest of the world in 2016, this isolation will benefit the United States.
These problems could be European such as another refugee crisis when the weather improves in the spring, another EMU implosion, Brexit, Catalonia leaving Spain or France electing the National Front. Or they could stem from Asia, with the implosion of the Chinese banking system or tensions with Japan.
And, of course, we have emerging markets problems everywhere you look, while the Middle East is experiencing capital flight for obvious reasons. All this means more capital flows into the isolated US, driving up the dollar. But if there will be problems in the global economy and if big exporters like Germany are set to suffer, why won’t little exporters like Ireland suffer too?
Here is the answer to the American paradox and to some extent the Irish paradox. As the dollar rises, corporate America will look to invest. But where can it invest?
Corporate America has to invest in cheaper offshore locations to avail of the stronger dollar. Where might these locations be? Well, obviously Ireland is one.
In time, accumulated profits need to be invested. Boardroom America can’t keep buying back its own shares or playing other financial tricks, particularly as share prices are now very high.
It will have to return to the old way of doing things, and this means old-fashioned investment in productive capacity.
As a result, I believe that Ireland will see a significant increase in productive investment from multinationals. This will propel the exporting side of the economy.
On the local side, the recent stalling in house prices is a good thing as it reduces any “overheating” problems and it helps to break the link between banks, house prices, credit and personal debt.
Savings that were hoarded in the crisis are being drawn down slowly and this is underpinning retail sales.
As this process seeps into the economy, unemployment will fall further.
Ultimately the local economy is moving in the right direction.
It doesn’t need any more stimulus, but tax cutting on an already overtaxed workforce is a political certainty, so we have to factor it in. This implies domestic demand will remain strong.
Taken together with the paradox of US investment here in Ireland, it is difficult to see the economy being nothing but more robust in 2016.
Top of the morning to ya David.
Michael.
Hi, The article makes no mention of how the massive amount of debt now on the fed balance sheet will be deleveraged and if Interest rates will rise as a result. Re us exports; does the provision of military services to the 130 plus countries the us army is station In get added to the gdp tally as surely the us is invoicing the local govts for services rendered? I thought with euro zone interest rates at minus levels that people would borrow in euro to invest in us assets but I could be wrong? As for local house prices… Read more »
Great Article David . I was delighted after reading it . I hope it is true and that what happens does happen. It was a fantastic positive adrenal for the start of the year and lifted my spirits and I am sure many other readers had more hope too. It was a prediction of now to happen which is more difficult than what will happen in the future.I am reminded of the lion roaring in the jungle and all the other animals congregate to listen attentively .A true Leo in spirit .There was no knock on in this article it… Read more »
Yes, the US and the US dollar, despite dysfunctional politics and a dodgy banking system, remains and will always remain the only true safe haven for the non-US wealthy. The ridiculous cost of condos and rents in Hew York City is a direct reflection of the foreign need to own a US domicile.The Arabs may prefer London but they do not spend time there in the properties they own. No one really wants them in New York.Cameron kisses their arses to keep them. But the US will not. The US does not want the Russians either, though London welcomes them.… Read more »
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“What is remarkable about the global system is that the United States, which should have a very high dependence on exports given its size, has a very limited one. America is exceptional and isolated.” What are you talking about??? DO you actually understand economics? By being a large net Importer America gets the world to work as slaves and earn dollars which are held at an account the federal reserve They get stuff in return for computer generated numbers in a database(or dollars). The GOAL is to IMPORT. You consume what you produce yourself plus what other nations send you… Read more »
I disagree with the content and the conclusions of the article in particular with the idea that the Fed has somehow turned the economy around and everything is now rosy in the US. Nothing could be further from the reality. What the Fed has done is created artificial asset bubbles in both real estate and certain stocks through their easy money and both of these bubbles are about to blow. In fact if you leave out the FANG stocks ( Facebook, Apple, Netflix & Google) the bubble is already starting to burst as seen in transport, industrial and even bio-tech.… Read more »
Question: “Germany is the world’s fourth largest economy and it exports just under 50 per cent of its GDP” and is therefore vulnerable to a drop in worldwide demand. That is like saying that California exports 50% of its GDP and is therefore vulnerable to worldwide demand when most of its exports go to other United States. Is not most of Germany’s exports going to other European States? This is just more of David’s German-bashing and trashing of the Euro. California and Germany are alike in other ways too which is why I love them both.
Hello,good evening..Happy new year Hope all is wonderful..? Nice positive article David… What about all the debt ? debt based economies ? “Our State pension funds short 120 billion euros..? Is their not still too much debt…We still do not manufacture anything..Are we not a service economy and a tax haven for Global Corporations ? Or is the debt a fiction like Q.E to infinity or will it bite us on the ass eventually ?…or will that be the new cycle of boom and bust..not property speculation ..but bonds and debts..what would happen if interest rates rose 2 % ?… Read more »
DJR Developers did not value the debt on Land Banks.That was intelligent professional bankers. The KEY BANKING question is- What METHOD did Intelligent professional bankERS use for valuing the debt on land banks that was written down by 90%. Grossly overvalued debt is the “Quality Assurance Failure” of our domestic economy that is to this day being ignored by economists, central bankers and politicians. David talks about the 1990’s. In the 1990’s a house was 3.5 to 4 times ONE annual wage. There was a “Real Value Debt” balance between wages and debt. Bankers, developers, tradesmen and the land owner… Read more »
There seems to be two parts to this argument: Firstly that the US $ is the major reserve currency, so people will accept it in exchange for goods, and secondly that US corporations will stop their various “financial engineering” antics and start to invest in productive industries. The US $ has been the major reserve currency since Sterling collapsed – soon after WW2 – so I’m not sure why this is should have more of an effect this year than over the last 8 (or 40). US corporations have been borrowing, at almost no cost, the money that they’ve been… Read more »
So if we ignore the gazillion dollar derivatives bubble and the ponzi national debts that are floating around everything in the garden is rosy.
Not the usual insiteful analysis we have come to expect from you David.
http://money.visualcapitalist.com/all-of-the-worlds-money-and-markets-in-one-visualization/
An interesting interview with Richard Fisher, the ex Head of the Dallas Federal Reserve: https://www.youtube.com/watch?v=7nuzT3rchPU&feature=player_embedded
A couple of interesting quotes: ‘The Federal Reserve front loaded an enormous rally’, and ‘by March 2009, we (the Fed) had already bought a trillion dollars in securities’, but there is much more that’s very interesting.
ps200306 House prices for average houses or first time buyer houses should never have anything to do with bankERS or politicians. Prices should always be connected to customer affordability/their wage packet. A 1990’s style calculation of 4 × todays average wage mortgage of(4 × 35000e)140,000e @ 7% (mid 90’s rate)for 20 yrs = 1,085e mth. A 2016 calculation of 6 × todays average wage mortgage 210,000e @ 4.5% for 25 yrs = 1,167e mth. Although there is not much between the repayments, todays 36 year old first time buyers will complete their mortgage at the age of 61. In the… Read more »
To all the commentators on here:
I have read many thought provoking and interesting points made by many commentators, from many points of view, on this complicated topic over the last few days on this comment thread! And all in the spirit of an honest, respectful thorough debate. Well done and long may it continue!
Worst start to the year in over 80 years portends the collapse of the US economy and the rest of the world with it.
All physical activity economically speaking is slowed rapidly.
At some point soon the world will divest themselves of US dollars just as Russia, China and soon saudi Saudi