Global economy in cruise control - but companies facing much uncertainty

Political tension in North Korea (its leader Kim Jong Un is pictured here inspecting the loading of a hydrogen bomb into a new intercontinental ballistic missile) could weigh down on investor confidence

GLOBAL activity has remained solid so far in 2017 with advanced economies showing positive growth and declining unemployment. Growth momentum in Asia continues with the Japanese economy growing at 2 percent and in China economic growth looks set to surpass the authorities' target for this year. But it must be noted that high Chinese debt is once again raising concerns and recently Moody's downgraded China's credit rating.

Despite the political uncertainty and President Trump's failure thus far to deliver his promised fiscal stimulus, the US economy has nonetheless been expanding. Without doubt US exporters have received a boost from the weaker dollar but there is a fair degree of uncertainty on the horizon. The impact of Hurricane Harvey and political tension with North Korea could weigh down on investor confidence. We can expect the political uncertainty in the US to remain high and the delivery of those promised tax cuts and infrastructure spending remain uncertain.

Last week's manufacturing data showed Europe to be leading the charge in terms of global economic growth. The recovery in the eurozone is gaining plenty of momentum with manufacturers now seeing a surge in activity. The EU PMI (an indicator that tracks employment, inventories and orders) hit 57.4 last week – well above the 50 mark that indicates expansion. What was most interesting about the European data was that the PMI reading for Greece hit a nine-year high.

A variety of indicators suggest that Europe's recovery is broad-based. Consumer confidence in the EU is now sitting at the highest level for 10 years, retail sales have been strong and are supported by low inflation.

This Thursday the European Central Bank (ECB) will meet to discuss monetary policy. Although no big announcements are expected until autumn, the euro appreciation will undoubtedly be at the top of the agenda. The strong currency which has been driven by rising optimism about the outlook for the euro area, has of course the potential to impact negatively upon exporters.

In addition, a strong euro puts further downward pressure on inflation across the European Union and could put the brakes on any ECB attempt to normalise interest rates. On a more positive note, concerns around the rise of extreme right-wing politics in Europe have thankfully receded.

At the CBI, we continue to expect a further improvement in global growth, the outlook remains good with some downside risks. For example, growing protectionist rhetoric in the US has the potential to weigh on global trade, particularly for smaller emerging economies in the region.

Closer to home, the UK economy is feeling the impact of political and economic uncertainty. The Governor of the Bank of England, Mark Carney, last month correctly asserted that UK households, businesses and financial markets have all reacted at different speeds and varying degrees to the prospects for the UK's departure from the EU.

Financial markets were ahead of the curve in marking down the UK's relative prospects. The immediate depreciation of sterling was a strong signal that markets were not optimistic about any Brexit outcome. Households on the other hand initially looked through the Brexit-related uncertainties.

However, more recently the inflationary impact from the depreciated pound has forced consumers to be more cautious in their spending. Consumer confidence has dropped, retail sales have weakened and of course this will have implications for the UK's aggregate demand. Mr Carney suggested that businesses have been somewhere in between markets and consumers in terms of their reaction to Brexit. However, he notes that since the referendum, they have invested much less aggressively than usual given the low interest rate environment and the strong global economy.

According to a CBI survey of 357 businesses, both members and non-members, over 40 per cent of businesses say that Brexit has affected their investment decisions. Of those, 98 per cent say that the impact has been negative. CBI members remain concerned about how things are playing out. Questions around future access to markets and access to skills still prevail.

Last month the UK government produced a number of Brexit position papers on a range of issues from a future customs agreement to the Government's proposals for Northern Ireland. In the Northern Ireland position paper the UK government has set out four objectives that will guide its negotiating strategy when addressing the unique circumstances of Northern Ireland and Ireland:

1 Upholding the Good Friday Agreement in all its parts;

2 Maintaining the Common Travel Area and associated rights

3 Avoiding a hard border for the movement of goods; and

4 Aiming to preserve North-South and East-West cooperation.

These objectives, and associated proposals, are to be welcomed and represent a positive step in the right direction. However, the details, especially proposals intended to avoid a hard border for goods, remain vague and require further work. Crucially, many of the proposals in this paper require considerable flexibility from the EU and must be negotiated.

The EU Brexit negotiator Michel Barnier last week made it clear that the UK's position papers are inadequate and suggested that sufficient progress has not been made. Ultimately, the uncertainty for businesses across Northern Ireland will continue for some time.

:: Angela McGowan is regional director of CBI NI. Follow her on Twitter @angela_mcgowan

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