Sunday 24 March 2019

David Chance: 'The shock from a hard Brexit would be felt immediately'

  

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David Chance

IF Britain leaves the European Union without a deal on March 29, the economy here will be hit badly and growth will slow sharply, although it will not be enough to tip the country into recession.

Yesterday's vote in Westminster to remove a no-deal option did not actually eliminate the possibility of that being the outcome on March 29, so it remains a very real risk to Irish businesses.

The shock of a hard Brexit would be felt immediately in financial markets with the pound falling sharply.

The Bank of England put the worst case probability at a 25pc drop in the value of sterling, although most economists say that parity with the euro is the furthest it would fall.

That, and the fear of regulatory barriers, would prompt businesses with direct exposure to Britain to put investment on hold, according to the Central Bank of Ireland, which could then feed through into a hit to consumer sentiment as workers fretted over job security.

What is clear, however, is the impact of Brexit will spread far beyond the confines of agriculture, which accounts for output of €3.4bn annually in an economy of €234bn.

The Central Bank has estimated growth would drop sharply to just 1.5pc this year in the event the UK plunges out of the EU without a deal, compared with forecasts of 4pc-plus if it stays in the bloc.

There is of course a rosier outlook. After a short, sharp recession in the wake of a hard Brexit, the UK could return to growth.

After all, in 2018 it outperformed Germany and France in terms of growth, even with Brexit hanging round its neck.

The problem with that view is that the risks are so heavily tilted to the downside, and a cliff-edge exit could permanently scar the economy here, saddling the State with lower growth than could otherwise have been achieved and lowering wages relative to where they would have been without Brexit.

Copenhagen Economics, which was commissioned by the Department of Business, Enterprise and Innovation to study the impact of Brexit, forecast it would lower the economy's output by approximately 3pc to 7pc in 2030.

According to the consultancy, measured relative to Irish gross domestic product in 2015, the difference between the "best" scenario - a European Economic Area deal - and the worst, in which tariffs were charged at the prevailing global rates, would be a loss to the economy here of €11bn in 2030. Up until now, Brexit has been a boon for Ireland and the relocation of firms here has created 4,500 jobs, many of them in skilled and highly paid industries.

That sunny scenario may not survive a hard Brexit in which real wages for low-skilled workers could be 8.7pc below the non-Brexit baseline by 2030, according to Copenhagen Economics.

At least the State will have the financial firepower to lean against any slowdown, after running a budget surplus in 2018.

Irish Independent

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