There are many bystanders across Europe awaiting with baited breath the results of the UK’s referendum on leaving the EU. In most cases it’s extremely difficult to assess what the potential impact is going to be on the UK economy never mind others in Europe. However there’s some consensus from some economists that it is the Irish economy could be most affected by a decision to leave.
Trinity College Dublin
The latest research is from the Oxford Economics group who have studied the potential impact on Ireland’s economy in some detail. Their conclusions are that a ‘Brexit’ is almost certainly bad news for Ireland with the worst case scenario suggesting a 2.2 fall in Irish GDP.
The Irish economy is of course, in a period of recovery after a meltdown in the recession. This year however the economy is forecast to expand by nearly 5% with a similar expectation for 2017. This growth rate would be seriously affected if the UK left the EU and an even bigger impact would be on small businesses in Ireland.
It is difficult to overestimate the links between the UK and Irish economies. Although they are separate economies which is often highlighted to me when I can’t catch the news on BBC iPlayer Ireland when visiting Dublin – the UK is by far their biggest trading partner in Europe and the referendum is bound to have a huge impact.
Over 40% of Irish exports are sent to the UK and the percentage is probably much higher among smaller Irish businesses who often are completely reliant on UK trade. The actual impact though would depend largely on post-exit negotiations with both the EU and the Irish government.
There are certainly some much more favorable options which involve various settlements and agreements being made on immigration and trade. These could possibly mean that the impact is fairly inconsequential although these are likely to take time to negotiate and it is expected that even the uncertainly would have some impact on the economies of both the UK and Ireland.
There are many ways of measuring the success of an economy, however for ordinary people – levels of employment are certainly one of the most important. When people are employed, the benefits accrue to the economy as a whole. People with jobs earn money to pay taxes, buy goods and services and invest in the economy. In addition, people with jobs don’t need supporting with benefits and support for food, housing and healthcare.
So the March report from the US Labor Department was very good news, with the report that 242,000 new jobs were created last month in the USA. This was quite significantly higher than had been predicted by many economists who expected unemployment to begin rising mainly due to the global economic stagnation that has been taking place. IN fact there were rises in all sorts of sectors from food services, construction and education. In fact there were only a few sectors that did struggle including the mining industry which has been suffering directly over the last few months.
The reported Unemployment rate has held steady at 4.9% which still represents an eight year low. Of course, although this figure sounds quite manageable as a percentage it does however mean that nearly 8 million Americans are without a job. There are also an estimated 6 million people in part time employment who are actually wanting to work full time. These figures are based on a fairly static ‘participation’ rate which is the number of people who are working or looking for work in the US economy.
Although these results sound fairly promising, there are other reports which have more cause for concern. For one the state of the trade deficit which has got steadily worse over the last twelve months. The current deficit (the amount the US imports compared with it’s exports) is now at the highest level in nearly five years. The main issue is the fall in US exports which is largely the result of the extremely strong dollar. There are some interesting reports on NBC and ABC regarding these economic issues on their web sites but you’ll need an American IP address to access them.
This is a significant worry though, falling exports will inevitably eventually filter down into the jobs market. The reason is that exports represent the production of US made products using US labor in American businesses. Although domestic demand is good, without exporting goods then overall demand for US goods and services will definitely start to fall and cause unemployment to start rising again. The business community are well aware of these risks and there is an increased pessimism which could cause further damage to the US economic recovery.
It’s just over 3 months since the Poland Law and Justice party (PiS) won control over the country and ever since then they have been embroiled in a series of controversies.
First there have been a series of controversies over the press and media freedoms since the Conservative party came to power with a promise of supporting Catholic ideals and supporting families with economic aid. Many of the country’s leading media have seen new leader’s who are sympathetic to the new party. In addition the new government has packed judges into the highest courts to boost it’s power base and prevent controversial legislation being blocked.
The latest laws implemented have seen increased the governments control over the prosecutor’s office and expanded surveillance laws to the police and security services. Many are worried not only about the authoritarian approach by the new Government but also how it will bring it into conflict with European democratic rules and standards.
The weakness of the economy is the government’s most important focus and one of the areas they are focusing on is the disparity between foreign and domestic capital, Foreign companies transfer over 20 billion euros every year from the Polish economy. More than 50% of the Poland’s GDP comes from foreign capital supported companies, and there are estimated to be only 6 Polish companies who can effectively operate on the world stage.
This is where the Government hope that they can redress the balance and rebuild Polish companies by increasing state control to support domestic companies. The hope is that Poland can become less dependent on foreign capital in strategic sectors like banks, energy and the media. Although it should be noted that the high growth experienced by the Polish economy over the last few years has largely been the result of foreign investment.
The worry is that an open European market does not work alongside nationalistic interventionist economic policies. Freedom of the press is important and you can already seen that criticism and problems are being suppressed in the media, although you’ll need a Polish proxy to see them on internet sites based outside Poland.
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It doesn’t seem so very long ago that we were discussing the economic successes of emerging nations like Brazil. From Europe we looked across at huge growth rates, rising living standards and a vibrant economy with a sense of extreme jealously.
However Brazil is now facing much bleaker economic prospects and it is a prime example of how quickly market sentiment can turn against an economy. The risks were always there, in this blog we highlighted here the fact that much of the success in Latin American countries was due to US economic policies – which meant that there was always a lack of genuine fundamentals underlying the growth. Much of the investment in these emerging countries was simply driven out of the US and Europe by very low interest and bond rates, when stability returned then the investment dried up in places like Brazil too.
The economic prospects for Brazil continued on a downward slope with this weeks decision for the credit rating agency Moody downgrading Brazil’s sovereign debt status to junk. The decision in itself will have little consequence, partly because it was anticipated and had largely been already priced into the markets. That’s not likely to be much relief though, more simply a confirmation of the bleak prospects of the Brazilian economy as a whole.
The reality is that Brazil has simply been spending too much with huge levels of debt and an ongoing fiscal deficit making it even bigger. As always in these situations, the talk is of a debt default which could be the catalyst for even more pressure on the country’s currency and a deepening recession.
Only a few years ago Brazil’s economy was growing at over 4% a year, whilst many other economies in the world were basically stagnant. Now that growth has been reversed and this year it is expected that it will contract by around 3-4% this year. This would represent Brazil’s worse recession in more than a hundred years, and with little indication of a turnaround the deficit is likely to increase.
The political situation is also unlikely to offer any relief for Brazilians, which desperately needs strong policies to deal with the economic crisis. However if you invest a few short minutes in looking at the Brazilian media online, possible with an online IP changer then you’ll see that there’s little sign of this happening. As one correspondent highlighted, the report by Moody’s is like a medical report which states the patient is sick yet is maintaining the same lifestyle which caused the problem.
The third quarter of this year saw another alarming rise in Canadian household debt reaching record levels. One of the main policy objectives currently is to limit the risks in a collapse in the Canadian real estate sector, which is looking a distinct possibility.
The latest figures suggest that credit market debt, which includes mortgages is now up to just under 164% of net income, nearly a whole percentage point higher than the previous quarter. Fortunately two other key indicators – the ratio of debt to assets and debts to net worth stayed relatively unchanged at 17% and 20.5% respectively, these figures have remained fairly consistent over the last couple of years.
There are real concerns that many families are taking unsustainable risks in order to buy homes especially in the high price areas like Toronto and Vancouver. The Government has responded by tightening mortgage lending requirements in it’s semi-annual financial review. It’s happening at a time when the cost of borrowing has dropped increasing people’s tendency to take on more debt.
However the most telling fact is the simple statement that Canadians owe almost $1.64 for every $1 of disposable income that they earned in the third quarter of this year. This has been confirmed by the National Statistics Agency this week.
There are lots of positive signs though, for instance income generation and business outlook seems positive with the Canadian economy seemingly weathering the economic turmoil better than most countries. Looking at independant economic reports particularly from foreign news stations like the BBC iPlayer (access here by proxy), all seem to point to a gentle recovery with the high property prices expected to stabilise in the near future.
Obviously raising interest rates would dampen down this rise in consumer credit and possibly reduce property prices too, however this is generally seen as a risky tactic in times of low economic growth and recession. The Government is hoping to keep stimulating growth and Canada has a particularly important digital market. Many entrepreneurs are basing themselves in Canada in order to run North American related digital businesses like the company who market this video making software.
For many years now investors have started to heavily back both global and African emerging markets. Slower growth rates in the ‘established economies’ have meant that there is little to attract their money. Places like Africa and South America often looked hugely attractive compared to say investing in Europe or North America. However market pressures are starting to affect these locations too and investment is slowing.
The problem is that economic indicators in some of these locations is looking ominous. Growth rates are falling here too and combined with rising inflation and currency depreciating are meaning that debt it rising too. Take for example places like Zambia and Ghana, two investment favorites on the African continent. Now there is a worry of rising debt highlighted by the IMF.
Zambia no longer looks like a safe and profitable haven for investment funds, the country has many issues which are dragging the economy back. Commodity prices are plummeting mostly caused by the slowdown in China which are very important for Zambia. They also have a host of internal issues – like a huge problem with power the electrical infrastructure simply not able to cope with the requirements of a growing country. There is also a sense of political instability with an election due in the following twelve months.
The currency of Zambia has now become the worst performing currency in the world, losing over 80 percent of it’s value over the year. There are numerous examples in the Africana economy of countries following a similar pattern to this and none of them are good. The lack of confidence in the economy and it’s currency is bound to affect investment and such growth will become something unachievable.
The story is similar in Ghana,which was the fastest growing economy in 2011. However that strong growth has now stalled and the country has actually needed external assistance in the last few months. There are a host of reports and studies available on line although to access on an iPad, you may have to spoof your IP address.
Although falling commodity prices have caused a lot of the problems there is still a common problem shared by these advanced African economies – the lack of strong and adaptable policies needed to react to external changes. It’s easy to be successful in the overall context of world growth but when that stalls it’s important to adapt your own fiscal policy. Very few of these economies have done this continuing to drift on in the same way, however without growth debt will rise quickly if you don’t check expenditure.
The success of these economies have obviously caused wage pressures, which have filtered into the economy. This has also added to debt pressures especially and meant huge financing gaps in all sorts of sectors.
Whenever debt becomes unsustainable it causes chaos, businesses fail, people lose their homes and livelihoods. There are few winners amongst both debtors and creditors which is why most societies have laws and guidelines for dealing with these situations. Mostly they help minimize the effects and enable a fair resolution on all sides. Often these help people hold onto their homes, businesses keep trading – not always of course but there is at least some sort of protection.
This however has not been the case for sovereign or state debt, the lack of any fair principles has caused chaos, economic and political instability. The latest example is of course Greece, where the crisis has deepened while the arguments go on. The problem is that the lack of agreement hurts both sides – economic output falls due to uncertainty which of course means that the creditors are even less likely to see their money repaid.
However last week we saw what looks like a genuine improvement for nations trying to deal with unsustainable debt problems. The United Nations general assembly has approved a set of guidelines and principles which can be applied to resolve disputes between countries and their creditors. It was passed almost overwhelmingly with 136 voting for, 41 abstaining and only 6 against. The primary hope is that the process will help protect countries from having to make destabilising cuts in order to satisfy aggressive creditors.
The principles are as yet non-binding but perhaps signal a watershed in how bankrupt countries are plunged into disarray in order to meet creditor demands. Nation debt has caused misery to millions across the planet in numerous situations. From Argentina’s default more than a decade ago to ‘vulture funds’, countries like Iceland, Ireland, Greece and El Salvador have also suffered from financial crisis due to debt issues.
It is disappointing but probably not surprising that the few nations which voted against the proposals were the powerful and rich creditors such as the USA, Germany, and the United Kingdom. Even the European Union collectively abstained despite various please for it to join the pro-group.
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Well today is Sunday the 5th July, the day after the anniversary of US independance but certainly today was an event of much more importance to the future of a European Union. The Greeks have voted no to the current offer from the EU of more money based on specific austerity measures.
It’s a difficult one to call, at the moment I’m watching the news on the BBC and there are pictures of Greeks dancing in the street at the result. I’m watching from a cafe in Western Paris known for it’s fast internet access even with a VPN to help watch BBC News live – available here.
Greek Exit From Euro?
So what’s next? Does the Greek Government now have a mandate to negotiate real change in the debt restructure? Well the reality is probably not, Greece is unable to function for more than a few days without a serious cash injection. It is certainly not a position of strength, although many would argue that a democratic mandate from a few million Euro citizens should count for something.
There are many Euro officials, probably not easy to find now, that stated that a ‘No’ vote was basically a vote to leave the Euro and rejecting the terms of the creditors. The problem is that when the amounts are this large creditors are not really acting from a position of strength.
You can’t send in a firm of bailiffs to a country to recover a few billion euros, after all where will sell a few hundred thousand flat screen TVs with all the settings set to Greek. The reality is that a default and exit for Greece will be devastating for both sides, so I feel that a compromise will definitely happen. You can get really upset about someone not paying you back 50 billion euros, but losing another 200 billion euros as your currency and economy crashes is not going to cheer you up.
Time will tell on what happens, at the moment I’m treated myself to buy IP address, so that I could watch all the different News sites and listen to experts across the world. There seems to be little common consensus, but the reality is that the amount that will be wiped off Euro stocks, the economies of the Eurozone and many other areas, will be many times more that the Greek debts will mean that someone will give ground. My money says that Greece have played a very shrewd game and will benefit from this no vote, however I could be completely wrong.