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Irish economy is most exposed to US interest rate tightening and sterling exchange rate depreciations Central Bank study finds

about 9 hours ago

Fiona Reddan

A new study found that Ireland is relatively more exposed to US interest rate tightening. Photograph: Joshua Roberts/Reuters




Global economic shocks have a potentially greater impact on Ireland than on the US, UK or euro economies, while the Irish economy is most exposed to US interest rate tightening and sterling exchange rate depreciations, a new paper has found.

In a new research paper, economists at the Central Bank examined the effects of large global shocks on the Irish macroeconomy using the global vector auto-regression (GVAR) model, and considering the economic response to five distinct shocks using quarterly data from 1980 – 2016.

It found that Ireland is relatively more exposed to US interest rate tightening, noting that a shock increase of 25 basis points to the US short-term interest rate is estimated to see Irish GDP decline by -0.56 per cent after eight quarters, with the loss estimated to be -0.6 per cent and statistically significant in the long run.

The economy is also vulnerable to a shock depreciation in the sterling-dollar exchange rate, equivalent to a currency devaluation of 15 per cent. This would see Irish output peak at an increase of 0.5 per cent after two quarters, declining to baseline levels over the next eight quarters.

“Ireland would be strongly affected by depreciation, with small initial declines increasing in scale within four quarters of the shock,” the paper found.

A negative shock to UK output growth equivalent to one percentage point of GDP, would also hit Ireland hard, and is estimated to cause a “significant and permanent decline” in Irish output growth, with long run reduction in growth of 0.45 per cent estimated over the horizon period of forty quarters.

However, Ireland was found to be relatively less exposed to a rise in global oil prices, while a reduction in Chinese output was fouand to be “moderately positive but insignificant” initially.

The study also shows that the magnitude of the effects arising from external shocks is typically larger in Ireland (in absolute value) than in the UK, the US or the euro area.

“This is most likely reflective of Ireland being a small open economy, with limited ability to mitigate the effects of economic shocks, combined with a less diverse economy than the other three countries/regions,” the report states.

State’s jobless rate now nearly three points below euro zone average of 8.9 per cent

about 12 hours ago
Updated: about 11 hours ago

Eoin Burke-Kennedy




Unemployment has fallen to a nine-year low of 6 per cent as conditions in the labour continue to improve.

The latest monthly figures from the Central Statistics Office (CSO) show the number of workers classified as unemployed fell by 1,800 to 131,300 in October, which equates to an annual decrease of 26,800.

The last time unemployment was at this level was in June 2008, just before the State was plunged into a financial crisis.

Ireland’s jobless rate is now nearly three points below the euro zone average of 8.9 per cent.

On current trends it could fall below 6 per cent this year before converging on full employment next year, which experts believe is around 5.5 per cent.

The latest numbers the seasonally adjusted unemployment rate for male workers was 6.7 per cent, down from 8.1 per cent this time last year, while the jobless rate for women was 5.1 per cent, down from 6.1 per cent 12 months ago.

The figures also show the youth unemployment rate was 14 per cent in October, down from 14.7 per cent the previous month.

Mariano Mamertino, an economist with recruitment website Indeed, said businesses were now dealing with the “good problem” of a tightening labour market.

Despite the progress, he highlighted two risk areas; the continuing high rate of youth unemployment and long-term unemployment.

“Although the rate of youth unemployment was down to 14 per cent in October, from 16.7 per cent a year ago, young people in Ireland are still almost three times more likely than older people to be unemployed today, with 27,000 people under the age of 25 who want a job not yet finding a role,” he said.

He cited research by the OECD showing that Ireland had the highest number of young people receiving unemployment and disability benefits among the OECD’s 35 countries.

“The second black mark is that nearly half of those who are unemployed are long-term unemployed, and therefore have been looking for a role for at least 12 months,” he said.

“It is unlikely that the sectors facing the most significant skills shortages such as technology, finance and biopharmaceuticals will be hiring from these two cohorts, and are more likely to look overseas for hires who have experience and are ready to hit the ground running,” he added.

60% of institutional investors expect their asset holding to remain the same

about 12 hours ago

Peter Hamilton

Brexit negotiations won’t have an effect on markets until 2018, State Street said. Photograph: iStock




A majority of investors still have no immediate plans to change the holding of their UK assets in the aftermath of Brexit, a survey shows.

The quarterly Brexometer index from asset manager State Street shows that while there has been a slight decrease in confidence, some 60 per cent of institutional investors expect their allocation to stay the same, an increase from last quarter.

However, the volume of those who believe Brexit will have a significant impact on their operating models increased to 22 per cent of respondents while 27 per cent suggested that asset owners would decrease their levels of investment risk over the next three to five years.

“The clock continues to tick on Brexit, but there remains limited evidence that financial markets or their participants are discounting a worst-case outcome,” said Michael Metcalfe, head of global macro strategy at State Street.

“Our metrics suggest that the majority of investors still have no immediate plans to change their holdings of UK assets. This has not changed even though the Bank of England (BoE) is expected to reverse its precautionary interest rate reduction this month and sterling’s under valuation has halved over the quarter,” he added.

The asset manager’s head of investments for Europe, the Middle East and Africa, Bill Street, advised that the ongoing Brexit negotiations won’t have an effect on markets until 2018 when the outline of a transitional and permanent agreement become clearer.

“Sterling in particular has risen from its lows earlier in the year. This partially reflects US dollar weakness but also greater than expected resilience from the UK economy and expectations of a rate rise by the BoE. However, it still remains undervalued against most currencies and is likely to continue to show volatility while Brexit uncertainty remains,” Mr Street added.

State Street’s quarterly index surveyed 100 institutional investors between the end of September and the middle of October to measure how sentiment toward Brexit is evolving.

Weaker orders led to a slowing in Ireland’s manufacturing sector in October

about 13 hours ago

Dublin has raised its economic growth forecasts for 2017 and 2018 due to the muted initial impact of the Brexit vote. Photograph: iStock




Growth in Ireland’s manufacturing sector slowed slightly in October due to weaker new orders, but purchasing managers expressed increased confidence about future output, a survey showed on Wednesday.

The Investec Purchasing Managers’ index slipped to 54.4 in October from 55.4 in September, holding above the 50 mark separating growth from contraction for the 53rd month in a row.

Although Ireland is seen as the European Union country most exposed to Britain’s decision to leave the bloc, Dublin has raised its economic growth forecasts for 2017 and 2018 due to the muted initial impact of the Brexit vote.

New orders slipped to a three-month low but new export orders were at a four-month high in October, with the authors pointing to increased demand from European countries.

The forward-looking Future Output subindex increased to an eight-month high of 74.4, with more than 50 percent of respondents predicting a rise in output compared with just 3 percent predicting a contraction.

The managers cited improved demand both at home and in export markets for their optimism.

“Given the positive outlook for the Irish and wider global economies, we view this bullishness as well-found,” Investec Ireland chief economist Philip O‘Sullivan said.

– Reuters

National Institute of Economic and Social Research says decision to leave the EU is hitting disposable income

about 16 hours ago

The UK’s decision to leave the European Union is cutting disposable income by more than £600 per household, according to the National Institute of Economic and Social Research. Photograph: Luke MacGregor/Bloomberg




The UK’s decision to leave the European Union is cutting disposable income by more than £600 per household, according to the National Institute of Economic and Social Research.

The pound’s tumble since the referendum has pushed inflation significantly higher, Niesr said, while Brexit has also negatively affected investment and productivity, increased uncertainty for businesses and damaged growth.

In a report unveiling its latest forecasts for the UK on Wednesday, Niesr’s Garry Young said: “Had sterling not depreciated and the economy continued to grow at its previous rate, as would have been likely with an improving global backdrop, real household disposable income per head might have been more than 2 per cent higher than now, worth over £600 pounds per annum to the average household.”

The report also noted that higher living costs associated with Brexit are likely to weigh more heavily on the unemployed, pensioners and single-parent households. Separate research showed that the consequences of the decision to leave the EU are likely to be more damaging to areas around London, which primarily voted Remain, than to more pro-Leave areas.


Democracies have to recognise their failures to counter a China that sees itself as an ideological rival

about 17 hours ago

Martin Wolf

A roadside poster of Chinese president Xi Jinping, in Beijing, last week: Under Xi, China is increasingly autocratic and illiberal. Photograph: Greg Baker/AFP/Getty Images




“Whether you like it or not, history is on our side. We will bury you!” Thus in 1956 did Nikita Khrushchev, then first secretary of the Communist party of the Soviet Union, predict the future.

Xi Jinping is far more cautious. But his claims, too, are bold. “Socialism with Chinese characteristics has crossed the threshold into a new era,” the general secretary of the Communist party of China told its 19th National Congress last week. “It offers a new option for other countries and nations who want to speed up their development while preserving their independence.” The Leninist political system is not on the ash heap of history. It is, yet again, a model.

Kruschev’s claim seems ridiculous now. It did not seem so then. The industrialisation of the Soviet Union had helped it defeat the Nazi armies. The launch of Sputnik in 1957 indicated it had become a technological rival for the US. Yet 35 years after Kruschev’s boast, the USSR, the Soviet Communist party and its economy had collapsed. This remains the most extraordinary political event since the second World War. Meanwhile, the most remarkable economic event is the rise of China from impoverishment to middle-income status. That is why Xi is able to talk of China as a model.

Brilliant choices

Yet how has the system that failed in Moscow succeeded in Beijing? The big difference between the two outcomes lay with Deng Xiaoping’s brilliant choices. China’s paramount leader after Mao Zedong kept the Leninist political system – above all, the dominant role of the Communist party – while freeing the economy. His determination to maintain party control was made clear by his decisions during what the Chinese call the “June 4 Incident” and westerners the “Tiananmen Square massacre” of 1989. Yet his resolve to continue with economic reform never faltered. The results were spectacular.

Whether the Soviet Union could have followed such a path is open to debate. But it did not. As a result, today’s Russia does not know how to mark the October revolution of a century ago: President Vladimir Putin is an autocrat, but the communist system has gone. Xi is also an autocrat. His dominance over party and country was on display at the party congress. But he is also an heir to the Leninist tradition. His legitimacy rests on the party’s.

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  • Xi Jinping’s elevated status on display after China congress power play

What are the implications of China’s marriage of Leninism and market. China has indeed learnt from the west in economics. But it rejects modern western politics. Under Xi, China is increasingly autocratic and illiberal. In the Communist party, China has an ostensibly modern template for its ancient system of imperial sovereignty and meritocratic bureaucracy. But the party is now emperor. So, whoever controls the party controls all. One should add that shifts in an autocratic direction have occurred elsewhere, not least in Russia. Those who thought the fall of the USSR heralded the durable triumph of liberal democracy were wrong.

Will this combination of Leninist politics with market economics go on working as China develops? The answer must be: we do not know. A positive response could be that this system not only fits with Chinese traditions, but the bureaucrats are also exceptionally capable. The system has worked spectacularly so far. Yet there are also negative responses. One is that the party is always above the law. That makes power ultimately lawless. Another is that the corruption Xi has been attacking is inherent in a systems lacking checks from below. Another is that, in the long run, this reality will sap economic dynamism. Yet another is that as the economy and the level of education advances, the desire for a say in politics will become overwhelming. In the long run, the rule of one man over the party and that of one party over China will not stand.

Economic superpower

All this is for the long run. The immediate position is quite clear. China is emerging as an economic superpower under a Leninist autocracy, controlled by one man. The rest of the world has no choice but to co-operate peacefully with this rising power. Together, we must care for our planet, preserve peace, promote development and maintain economic stability. At the same time, those of us who believe in liberal democracy the enduring value of the rule of law, individual liberty and the rights of all to participate in public life – need to recognise that China not only is, but sees itself, as a significant ideological rival.

The challenge occurs on two fronts.

Partner not friend

First, the west has to keep a margin of technological and economic superiority, without developing an unduly adversarial relationship with Xi’s China. China is our partner. It is not our friend.

Second and far more important, the west (fragile as it is today) has to recognise – and learn from – the fact that management of its economy and politics has been unsatisfactory for years, if not decades. The west let its financial system run aground in a huge financial crisis. It has persistently underinvested in its future. In important cases, notably the US, it has allowed a yawning gulf to emerge between economic winners and the losers. Not least, it has let lies and hatred consume its politics.

Xi talks of the “great rejuvenation of the Chinese nation”. The west needs rejuvenation, too. It cannot rejuvenate by copying the drift towards autocracy of far too much of today’s world. It must not abandon its core values, but make them live, once again. It must create more inclusive and dynamic economies, revitalise its politics and re-establish anew the fragile balance between the national and the global, the democratic and the technocratic that is essential to the health of sophisticated democracies. Autocracy is the age-old human norm. It must not have the last word.

– Copyright The Financial Times Limited 2017

Eurostat figures show unemployment falling to a nine-year low

Tue, Oct 31, 2017, 21:15

Claire Jones in Frankfurt

European flags in front of the European Commission in Brussels. Photograph: Epa/Stephanie Lecocq




The euro zone has recorded better growth figures than expected, indicating the recent strength of the euro has done little to impede a burgeoning economic recovery. In a further sign of upturn, unemployment has fallen to a nine-year low.

Data released on Tuesday showed the euro zone economy grew 0.6 per cent in the third quarter from the previous three months. The figure was slightly above analysts’ expectations and comes despite fears that a stronger currency would hurt the region’s exporters. The single currency rose from about $1.14 against the dollar in early July to more than $1.20 in early September.

The flash estimate, produced by Eurostat, the European Commission’s statistics bureau, was down slightly from a revised 0.7 per cent for the previous quarter, but means the economy has expanded by an impressive 2.5 per cent over the past year.

Unemployment fell to its lowest level since January 2009, hitting 8.9 per cent in September. Youth unemployment remains at 18.7 per cent but has fallen substantially during the past year, from 20.4 per cent in September 2016. Sharp falls in the jobless rate have also been recorded in some of the region’s most vulnerable economies, such as Greece, Cyprus and Spain.

“It can’t really get much better. Growth is high, unemployment is falling. Strong conditions outside the euro area in the region’s main trading partners have offset any impact from the euro’s appreciation,” said Holger Schmieding, chief economist at Berenberg, an investment bank.

Figures published earlier on Tuesday showed that France, the region’s second-largest economy, continued to expand at a steady pace after years of lacklustre growth.

The euro zone recovery has been the surprise economic success story of the past year. Policymakers in the region have started to remove some of their support in response to signs the economy is strengthening after years of crisis and stagnation.

Downsize bond buying

Last week the European Central Bank announced it would downsize its bond buying under its quantitative easing programme. The bank is now buying €60 billion of bonds a month as part of the 2.6 trillion programme but will buy €30 billion a month from January until next September.

Price pressures, however, remain weak. Inflation continues to fall short of the ECB’s target of just under 2 per cent, falling from 1.5 per cent last month to 1.4 per cent in the year to October. Core inflation, which strips out price changes for more volatile items such as food and energy, fell to 0.9 per cent, its lowest level since May. The stronger currency weakens inflation by lowering the cost of imports.

Mr Schmieding added: “The fall in core inflation is mainly down to one-off factors, it isn’t the start of a new trend. But there are no convincing signs of a pick-up in inflationary pressures, and that fully vindicates the ECB’s decision to proceed with a slow end to its bond buying.”

– Copyright The Financial Times Limited 2017