- Leading think tank forecasts strong economic growth in Ireland, ignores global risks - Impact of Euro zone debt crisis and global geopolitical risk underestimated - Global macro-economic, systemic, geo-political and monetary risks largely ignored - Risk that lulls politicians, investors and people into false sense of security … again
Ireland’s leading economic think tank, the Economic and Social Research Institute (ESRI) has issued its latest quarterly report in which it forecasts that the strong economic performance in Ireland is set to continue.
It has forecast strong economic growth of 4.4% this year and a lower but still strong 3.7% next year. It says it expects unemployment in Ireland to drop below 10% this year for the first time since 2008 and as low as 8.4% next year.
The report said the economy is now growing so strongly that Ireland’s budget deficit could be virtually eliminated by next year – two years ahead of schedule.
The economy was supported by the first growth in consumer spending since the start of the recession. Consumer spending grew by 1.1 per cent last year, and the think tank forecasts this to rise to 2 per cent this year.
However, the think tank does acknowledge that it will be constrained by the still very high levels of household and mortgage debt, by people prioritising debt repayment over consumption, and by the still falling level of consumer credit from Irish banks.
It says that while exports drove growth up until the middle of last year, domestic consumer spending started to play a stronger role in economic growth in the second half.
This is concerning given that the euro began plummeting against both the dollar and the pound during the middle of last year. This should have given exports a strong boost in the final quarter of 2014 and into 2015.
It highlights the export dependent nature of the Irish recovery and the risks posed by currency wars. The recent sharp fall in the euro should help exports. At the same time, the U.S. may be forced to maintain ultra loose monetary policies and competitive currency devaluations. The strong dollar is undermining U.S. exports. If this happens, it may have a negative impact on Irish exports and the growth that the ESRI expects.
We believe the report, which views Ireland’s economic performance as though it were independent of international considerations, is misguided. It assumes that there is a real, sustainable global economic recovery underway and if Irish politicians manage the economy correctly, Ireland will continue to recover from its economic collapse.
This is quite an assumption given the uncertain world of today and the fact that the Irish economy is a tiny, tiny fraction of the global economy.
It ignores many of the still significant global macroeconomic, systemic, geopolitical and monetary risks (MSGM) of today.
- a) Macroeconomic risk is seen in the risk of recessions in major industrial nations with negative data emanating from the debt laden Eurozone, UK, Japan, China and U.S. recently.
The collapse in oil prices is a reflection of lack of demand for energy globally. Industry is buying less oil as economic activity is declining globally.
Issues with banks, a la Lehman Brothers, a major terrorist event or a another war in the Middle East or with Russia would badly impact fragile consumer, investor sentiment and western economies.
- b) Systemic risk remains high as some of the major problems in the banking and financial system have not been addressed. There is a real risk of another ‘Lehman Brothers’ moment or a new ‘Grexit’ moment and the seizing up of the global financial system. The significant risk from the unregulated “shadow banking system” continues to be significantly underappreciated.
Global debt has ballooned more than 25% since the 2008 crisis which was itself a product of excessive debt. This dwarfs the growth in the global economy over the same period. The world is now in a deeper, though as yet unacknowledged, debt-crisis than it was in 2008.
- c) Geopolitical risks are elevated – particularly in the Middle East. This is seen in the serious developments in Syria and in the tensions between Iran and Israel. There is the real risk of conflict and consequent impact on oil prices and the global economy. There are also simmering tensions between the U.S. and its western allies and China and particularly Russia.
- d) Monetary risk is high as the policy response of major central banks to the first three risks continues to be ultra loose monetary policies, ZIRP, NIRP, the printing and electronic creation of a tsunami of currency and the debasement of currencies.
Should the macroeconomic, systemic, or geopolitical risks increase even further in the coming months than the central banks response will again be by monetary and further currency debasement which risks currency wars deepening. This risks the devaluation of all fiat currencies and serious inflation in the coming months and years.
That the ECB has begun a trillion euro QE program is clear evidence that the policies of the past seven years have not been effective and the Euro zone, bloated with unpayable debt like the rest of the developed world, risks economic stagnation and in a worst case scenario – economic and political contagion in the Euro zone.
Mario Draghi’s QE experiment and printing of EUR 1.1 billion is an act of desperation.
What catalyst triggers the next crisis is anyone’s guess? There are many options to choose from.
It remains prudent to remain aware of the risks and adopt a cautious approach with regard to personal finances and indeed the nation’s finances.
Ignoring the considerable risks in the mid 2000s led to the global financial crisis. It also led to significant pain being inflicted on those who had been lulled into a false sense of security by think tanks, politicians and assorted financial experts.
‘Forecasts’ and forecasting the future is an extremely difficult task. It is essential for planning but must be qualified and anchored in empirical data with an international context. It is important that major caveats and health warnings are included.
Latest ESRI forecast predicts strong GNP growth in 2015 and 2016
OUTLOOK 2015 – Uncertainty, Volatility, Currency Devaluations – DIVERSIFY
MARKET UPDATE
Today’s AM fix was USD 1,192.55, EUR 1,088.89 and GBP 801.18 per ounce.
Yesterday’s AM fix was USD 1,193.25, EUR 1,085.56 and GBP 798.96 per ounce.
Gold rose 0.26 percent or $3.10 and closed at $1,193.70 an ounce yesterday, while silver slipped 0.35 percent or $0.06 at $17.00 an ounce.
Gold inched downward after its five day rally, but hovered near its two and a half week high.
Gold in Dollars – 1 Year
In Singapore gold for immediate delivery pulled back 0.2 percent to $1,190.90 an ounce near the end of trading but was not far from a high of $1,195.30 hit in the prior session.
Yesterday, Fed policymaker James Bullard said that a first rate hike “sometime in the summer” would still leave monetary policy extremely accommodative, and that market expectations should be better aligned with those of the Fed considering the current “boom time” for the U.S. economy.
Positive economic data from the Eurozone strengthened the euro versus the dollar, and expectations for a U.S. interest rate rise is focused on later in the year. As ever, watch what the Fed’s actions rather than their daily ‘jawboning.’
Gold is at $1,192.58 per ounce or up 0.08 percent. Silver is $16.96 per ounce or plus 0.25 percent and platinum is at $1,143.25 per ounce or up 0.37 percent.
Gold in Euros – 1 Year
Spot gold at $1,200 per ounce remains a key psychological level for gold and a close above this level should see gold eke out further gains.
The European Central Bank banned Greek banks from increasing holdings of short-term government debt, as concerns grow that they are nearly out of cash. Eurozone finance ministers will hold a call on Wednesday to discuss progress on Greece, amid concerns that the country will run out of money by early April.
A clash in the Ukraine amongst politicians was seen as Ukrainian President Petro Poroshenko accepted the resignation of Igor Kolomoisky, the billionaire governor of the strategic Dnipropetrovsk region who has clashed with authorities over the control of energy companies.
Yesterday, in a vote that largely slid under the radar, the U.S. House of Representatives passed a resolution urging Obama to send lethal aid to Ukraine, providing offensive, not just “defensive” weapons to the Ukraine army – the same insolvent, hyperinflating Ukraine which, with a Caa3/CC credit rating, last week started preparations to issue sovereign debt with a U.S. guarantee.
The resolution passed with broad bipartisan support by a count of 348 to 48. The measure urges Obama to provide Ukraine with “lethal defensive weapon systems” that would better enable Ukraine to defend its territory from “the unprovoked and continuing aggression of the Russian Federation.”
Geopolitical risk remains very high and is not priced into “irrationally exuberant” markets.
