Tuesday 23 July 2019

Irish economy caught in the middle of UK's Brexit chaos

Brexit is the immediate, 'unclear and present danger' facing the Irish economy

'Whatever form of EU exit the UK takes, its departure is likely to have some negative impact on the Irish economy.' Stock image
'Whatever form of EU exit the UK takes, its departure is likely to have some negative impact on the Irish economy.' Stock image

Austin Hughes

What picture will we remember at the end of 2019? Will queues be for bread or for houses? Will we be talking about shortages of medicine or workers? Will the economy fly or could planes be grounded? In short, will this be a year of pain or prosperity? The answers depend critically on which of two paths the Brexit process takes.

Brexit is the immediate, 'unclear and present danger' facing the Irish economy.

Less than 10 weeks from the scheduled departure date, the nature of the UK's future relationship with the EU and the time and manner in which this will change is entirely unclear. This makes it almost impossible to predict the precise impact Brexit may have on the Irish economy in the year ahead.

Whatever form of EU exit the UK takes, its departure is likely to have some negative impact on the Irish economy.

Equally important, circumstances for individual firms and households could vary markedly as Brexit threatens an uneven range of gains and losses across businesses and geographic regions of the country.

Frustratingly, at this late stage, the ability to say when Brexit pain is likely to be felt, how severe it might be, what areas will suffer most and where offsetting gains may occur is extremely limited.

It's either solid or struggling

If, sooner or later, some form of the draft deal between the UK and EU is agreed by the UK parliament, the likelihood is that economic ties between the UK and Ireland will remain relatively close and the transition to new structures will not take place for two more years. In such circumstances, any Brexit impact in 2019 will be limited. There could even be a small and temporary 'relief' bounce in sentiment and spending.

An orderly and slow Brexit might shave well under 1 percentage point off Ireland's near-term growth. This would reflect some alteration to supply chains and poorer prospects for exports to the UK, but these developments wouldn't prevent healthy gains in activity and employment. This soft-but-not-entirely-smooth Brexit is envisaged in KBC's current forecast of solid Irish GDP growth of 3.5pc in 2019.

Alternatively, if the UK 'crashes out' of the EU in March 2019 without a transition deal or some significant agreement on trading relations, this would represent a sudden and severe shock to the Irish economy.

As the disruptive effects would be front-loaded into 2019, this year would bear much of the burden of adjustment and, consequently, much of the hit to activity and employment in the event of a 'no-deal' scenario.

My strong view is that even with some offsetting domestic policy measures and support from the EU, the adverse short-term impact of a 'no-deal' outcome is likely to be a significant multiple of that of a more orderly separation. My tentative estimates suggest that a 'disorderly' Brexit could cut Irish GDP growth for 2019 by two to three percentage points.

Given current momentum and the possibility of offsetting actions at national and EU level, it seems likely that Irish GDP growth in 2019 would still be positive but possibly only marginally so in the event of a 'no deal' Brexit. A similarly weak outturn could be envisaged in 2020. Such an outcome would also produce marked variations in sectoral and regional conditions with border areas and sectors such as agri-food particularly exposed.

Brexit fallout has been less than feared so far, but some strains are emerging

To date, there has been little evidence of a material 'macro' hit to the Irish economy from Brexit-related developments. Indeed, weak sterling has weighed on Irish consumer prices and boosted household spending power.

Although merchandise exports to Britain and tourism revenues from the UK have underperformed, they haven't collapsed. While some sectors and areas faced serious problems, a generally healthy Irish economy meant these didn't spill over into generalised weakness.

The best barometer of the continuing health of the Irish economy is sustained strength in employment. However, slower jobs growth of late partly reflects increased caution on the part of business as companies consider a weaker global growth outlook and an imminent but increasingly unclear Brexit.

The particular weakness of employment in the Border area - the only region to record falling employment in the past two quarters - could also be a reflection of its particular exposure to Brexit/sterling weakness.

Similarly, the softer tone of the KBC Bank/Chartered Accountants Ireland business sentiment index for the third quarter hints that some companies were implementing a precautionary pause in hiring related to 'crash out' Brexit concerns.

In the same vein, households are now more nervous about Irish economic prospects than at any time for the past five years.

According to the latest KBC/ESRI consumer sentiment reading, just one in four consumers expect a stronger Irish economy over the next 12 months while one in three think conditions will weaken in the year ahead. If this translates into a more cautious approach to spending, it will further weigh on the outlook for growth.

Housing market bump or bounce?

Until now, there has been little indication of widespread Brexit-related effects in the housing market. However, growing concerns about the UK crashing out in early 2019, could weigh on property prices and transaction volumes.

In more likely scenarios where a disorderly Brexit is avoided, any related adverse effects could be modest and short-lived.

Indeed, if we see a 'soft and smooth' Brexit, renewed optimism about Irish economic prospects could see a slight 'Brexit bounce' in Irish property prices later in 2019. In summary, Brexit makes this the perfect time for two-handed economists - 2019 looks set to be a year in which the Irish economy either stays strong or struggles.

Unfortunately, at this point even a one-handed economist might find it hard to point towards which path lies ahead.

Austin Hughes is chief economist at KBC Bank Ireland

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