The fragility of consumer and business confidence, and its impact on economic performance, has been brought into sharp focus recently.
ast year ended with confidence indicators ebbing lower and more recent sentiment indicators were suggesting that confidence is not returning. Business activity ended 2019 on a 10-month downturn streak according to the Ulster Bank PMI.
Since the start of the year, the outbreak of the coronavirus has seen confidence levels fall even more rapidly, given the already considerable tragic human cost of the virus. The wider narrative in the media about factories closing and shops running low on some stock has been a sharp reminder of just how integrated the global economy is and how reliant it is on sentiment.
For a brief period, the coronavirus was being treated as an isolated issue, solely affecting a region in China that few of us had heard of. Even then, there were signs that the virus could have an impact on wider economic performance. One conversation I had with a local businessperson at that time outlined how their Chinese supply chain was disrupted and stock was running low. Once the virus broke out of China, a panic appears to have set in. It is not for me to consider if panic is justified or not, merely to note its impact.
Panic first manifested in global stock markets, which experienced a brutal downturn, while the valuation of safe assets spiked sharply. A rush to safe assets such as gold is usually a sure sign that the economy is heading for trouble. And so it seems. Across the globe, there are already numerous examples of where coronavirus impacts are being felt. In what is a virtual shutdown of the Chinese economy, the ripple effects are being felt across supply chains, shipping, transport, movement of goods and tourism.
OPEC are proposing to cut oil production as demand has fallen and sporting event organisers are considering running events behind closed doors or calling them off altogether.
The OECD has recognised the scale of the potential impact from the coronavirus, warning that the virus will have a major impact on economic growth worldwide this year. While all highly uncertain, the OECD have reduced annual global GDP growth to 2.4% in 2020 as a whole, from an already weak 2.9% in 2019, with growth possibly even being negative in the first quarter of 2020.
If the virus is longer lasting and more intensive than envisaged (current assumptions are that it will peak in the first quarter of the year) OECD suggest growth could reduce to 1.5% in 2020, half the rate that they were projecting before the outbreak.
In our local economy, the economic prospects are equally uncertain, with considerable (and mounting) downside risks. These downside risks are compounded by the news that Flybe has just entered administration, citing added pressures of the coronavirus as one of the contributing factors in the airline's demise. Flybe was already struggling with fuel costs, soft demand and competition but this collapse, where coronavirus has been offered as a contributing factor, adds to the prevailing fragility in confidence circling the local economy.
It gives us all pause for thought as to how a shock to the system can have potentially fatal economic consequences. Prior to the Flybe collapse, the tourism sector had already been growing increasingly nervous of how the coming year will pan out.
The success of the sector over recent years has seen it grow to a £1bn industry and has seen major investments, totalling approximately half a billion pounds, made by hoteliers to bring new rooms to market. Filling these rooms is a constant marketing challenge and there are already reports of cancelled trips from Chinese and Italian visitors. Even without the collapse of Flybe, the cost of economic frailty was starting to tick up. The potential loss of so many regional flights from Flybe's collapse could be a hammer blow to the hospitality sector, with Hospitality Ulster describing it as devastating. The Northern Ireland Tourism Alliance also suggested that the consequences for the entire Northern Ireland economy, not just tourism, will be incalculable if support is not forthcoming for regional air transport. Clearly, connectivity is vital to the economy here.
Without it, it is not only tourism that suffers, the wider business community feels the impact and Northern Ireland will find it increasingly difficult to position itself as 'open for business' for inward investment. Confidence, which has been fragile for some time, seems to have evaporated.
It can be difficult to regain confidence once it is lost, especially in the face of a new global threat which we have very limited understanding of. There are some policy levers that can be pulled to try and influence our confidence. The upcoming budget from the new Chancellor could be an opportunity to turn on the spending taps, or offer a few giveaways, under the cover of combating the economic shock from the coronavirus.
Further, the Fed has just cut interest rates - will the Bank of England follow suit?
In next week's Economy Watch we hear from Lisa Wilson of Neri