The global economy is hurtling towards two of the most potentially severe headwinds in a decade, but the incoming chief economist of the European Central Bank had a message in Hong Kong on Tuesday: don’t panic.
March will see deadlines expire for the partial truce in the US-China trade war and for the United Kingdom to negotiate an orderly exit from the European Union, both of which have the potential to send shock waves through the global economy.
Philip Lane, who was endorsed by European finance ministers on Monday to be the next chief economist of the European Central Bank (ECB), acknowledged that “that there’s been some movement in risk towards the downside” in recent weeks.
Indeed, Brexit and the trade war were among the issues flagged by the International Monetary Fund (IMF) this week as part of a brewing “economic storm”.
Christine Lagarde, IMF managing director, told the World Government Summit in Dubai on February 10 that “trade tensions and tariff escalations, financial tightening, uncertainty related to the Brexit outcome and spillover impact and an accelerated slowdown of the Chinese economy”.
With regard the trade war and the Chinese economic slowdown, however, Lane said that it would “take a wide imposition of tariffs to have a wide impact” on the global economy.
“Clearly it’s early in 2019, but we have to not overreact to any announcement or data release and take a measured approach to all the data,” he said, adding that the integration of the global economy means policymakers the world over are watching the outcome of trade talks.
“The interconnections in the world economy now are so strong. Policy uncertainty is more elevated than normal. A lot depends on how that uncertainty is resolved. It could be upside if there’s a favourable policy resolution. If it’s ambiguous, or if the direction for the future is unclear, clearly that’s negative for investors and sentiment,” Lane said.
On Thursday, vice-ministerial level negotiators from the US and China will meet in Beijing for the next round of talks aimed at ending a trade dispute that has escalated significantly since last July.
Meanwhile, Lane said that “it remains more likely a deal” will be agreed between the European Union and United Kingdom before the Brexit deadline on March 29.
Should UK Prime Minister Theresa May fail to strike a deal, the UK will crash out of the bloc without any agreement on a future relationship between it and the European Union.
Lane, who is currently the governor of the Central Bank of Ireland, added that while the issue of Brexit is a huge concern to the economies of Ireland, the EU and the UK, it is not an issue that threatens the world economy.
“The UK is an important country, but quantitatively it’s small – it’s not a macro issue, it’s important for us in Ireland, but at a macro level probably less so,” he said after a speech at the Hong Kong stock exchange.
Despite this, Lane said that should negotiators not reach a deal, and the UK crash out of the EU in a hard Brexit, then the economic bloc’s financial system will be able to withstand the blow.
“Finance is the one area maybe where it was always part of the plan that no matter what happens, hard Brexit, soft Brexit, the financial system would be ready,” he said.
“All of the contingency planning has been based on no deal. Firms hope those contingencies won’t have to be activated, but absent the case, we and other regulators have prepared firms to be regulated for no deal.”
As the only European Union nation sharing a land border with the UK, Ireland is disproportionately exposed to the risks of a hard Brexit, which would see the UK leave the EU without a trade deal.
Hard Brexit could lead to the return of a hard border between Northern Ireland, which is part of the UK, and the Republic of Ireland, which is remaining in the EU as it is not part of the UK.
Conversely, Ireland and its capital of Dublin specifically is set to benefit from the exodus of financial services companies from the City of London, with a view to maintaining their EU passporting rights, which permit them to trade freely within the bloc.
“Well over 100 firms across the full range of financial industry have either looked to expand their operations in Dublin or set-up in Dublin to manage the fallout from Brexit,” Lane said, citing the examples of Barclays and Bank of America Merrill Lynch as banks which have made substantial operational moves to the Irish capital.
The ongoing uncertainty caused in part by Brexit and the trade war caused the IMF to slash its global economic growth forecasts.
In its revised forecasts issued in January, the IMF predicted that the global economy will grow at 3.5 per cent this year and 3.6 per cent next year, down 0.2 and 0.1 percentage points, respectively, from its previous outlook.