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Three big international headwinds that could derail Ireland

Sunak’s Rwanda immigration plan, the election of Donald Trump in the US and a stagnating euro zone economy could all be big problems for us

Donald Trump being re-elected US president would arguably be the biggest disruption to the global economy. Photography Win McNamee / POOL / AFP

Eoin Burke-Kennedy's face
Eoin Burke-Kennedy
Sun May 12 2024 - 11:45

The rest of this year looks set to be marked by more geopolitical volatility. Conflicts in Ukraine and the Middle East combined with a busy global electoral cycle could throw up all sorts of uncertainty. Here are three events that could reverberate negatively on Ireland.

Sunak’s controversial Rwanda deportation plan

Britain remains in the grip of a fierce backlash against immigration, one that Brexit has failed to quell and one that is now spilling over into Ireland.

The war of words, the tit-for-tat ministerial snubs that erupted in the wake of prime minister Rishi Sunak’s comments that the rise in people seeking asylum here after crossing from Northern Ireland was evidence that his country’s Rwanda policy was working has pushed Dublin-London relations back into a Brexit freeze zone.

As Dublin threatens to rewrite existing laws to facilitate deporting immigrants back to the UK and Sunak says he is not going to accept them “when the EU doesn’t accept returns (from the UK) back to France”, this could get worse before it gets better. Not least with former UK cabinet minister Jacob Rees-Mogg suggesting illegal immigrants could be bussed “to facilities near the Irish Border” presumably to encourage the flow.

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The arrival of more than 104,000 Ukrainian refugees since 2022 combined with the Government’s policy of channelling them away from an already strained housing system and into a network of local hotels and community centres as well as a spate of arson attacks has already elevated immigration to the biggest issue in the country right now.

The asylum seeker system is creaking and the spillover from UK’s Rwanda policy may prove a tipping point.

The question now is whether an unmanageable immigration flow from the UK jeopardises the operation of the Common Travel Area (CTA), the arrangement between the UK and Ireland that allows citizens move freely to live, work and study.

Friction-free travel between Ireland and Britain has been a linchpin of the economy here, facilitating the evolution of Dublin’s financial services industry.

On the upside Sunak, now seemingly a busted flush electorally, is likely to be replaced by Keir Starmer whose Labour Party remains opposed to the Rwanda plan. Still, having a Common Travel Area and two separate immigration policies isn’t going to be straightforward.

The election of Donald Trump in the US

The possibility of Donald Trump being returned to the White House in November could have seismic consequences for global trade, which as a small, export-orientated economy Ireland is exposed to.

Trump has made no secret of the fact that he plans to build a wall or “a ring” of tariffs around the US economy if elected. Among his proposed measures is a 10 per cent universal duty on all US imports, though Trump has hinted the figure could be higher. Chinese imports could face a tariff as high as 60 per cent which Trump believes would bring back production to US shores.

Such a move has the potential to trigger the biggest trade war in history and the biggest check on globalisation to date. The US has haemorrhaged manufacturing jobs over the last three decades, losing close to five million since 2000. The decline has been unprecedented by US standards and has created, or at least compounded, what’s often referred to as a Rust Belt from the midwest to the Great Lakes.

Trump has repeatedly linked the phenomenon to the offshoring of jobs by big US corporates and the introduction of China into the global trading system in 2000. While the OECD (Organisation for Economic Co-operation and Development), the IMF (International Monetary Fund) and the World Trade Organisation are all forecasting a sharp rebound in global trade this year after a slowdown in 2023. their reports contain downside risks to the outlook, one of which is the creeping tide of protectionism or self-reliance. A revitalised Trump in the White House is surely the top risk.

An inflation sting in the tail

Ironically economists predict Trump’s tariff plan could trigger another bout of inflation in the US, which has already deferred expected interest rate cuts in the face of stubbornly high price growth.

While the euro zone economy appears to be on a disinflationary path, escalating geopolitical tensions pose big upside risks. European Central Bank (ECB) vice-president Luis de Guindos recently pinpointed the Middle East as a more likely source of any new price shock.

“Should tensions in the region escalate further, major trading disruptions and impediments to oil supplies could push up energy prices and freight costs in the near term, disrupting global trade,” he said.

ECB policymakers have also been citing elevated inflation in the services sector linked to catch-up wage demands as a problem area. If anything the disinflationary path promises to be bumpy rather than smooth.

And while the euro zone returned to growth in the first quarter after effectively flatlining since late 2022 and the energy price shock, the bloc is facing weaker-than-expected growth prospects over the next two years on the back of low productivity and higher wages.

There is an overly optimistic assumption that inflation and its economic fallout have been neutralised, but it comes with big downside risks.

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