EY's Economic Eye Forecast in December mentioned that it was the most uncertain economic climate in decades. Six months on, do you think the island of Ireland is in a time of economic uncertainty?
Sadly, uncertainty is still with us six months on. The Brexit negotiations are just beginning and it is impossible to know what trade or migration policy will look like or how the border will function. The economy across the island has shown remarkable resilience with economic growth and job creation continuing throughout this period of flux. It reminds us that business and people make decisions on facts, not speculation, and until the facts are known and firms or individuals need to react they will continue to go about their business. One might expect that day-to-day transactions would continue but larger investment decisions – buying a house or investing in new equipment, for example – might be delayed but even in these more long-term decisions the impact has been more muted than many experts predicted. With the UK election providing a surprise result, the delay in re-establishing an NI Executive and the new Taoiseach settling in, there continues to be political change across the island but, once again, it is worth remarking that growth continues.
How is Brexit affecting current economic forecasting?
It is making short term forecasting very challenging indeed. Every forecast produced is conditional on the assumptions made about, in particular, trade policies post-Brexit. The Economic Eye outlook assumes the UK reverts to WTO conditions, which would be a very challenging outcome for the agri-food sector on the island and hence both agriculture and industrial outlooks are relatively weak in the current forecast. A different tariff arrangement would result in an alternate forecast.
In the longer term, firms tend to adapt to tariffs and other policy changes with remarkable speed. Often the view up close to a momentous change – the decision for the UK to join the Euro or not; the change from UK to Chinese sovereignty in Hong Kong; the move to embrace free trade in New Zealand – all have panned out very differently to how it was predicted by many. Forecasts should, therefore, be seen as conditional and the accompanying narrative is arguably more important.
The Economic Eye Summer Forecast boasts increased job growth in the future for both NI and RoI – 29,000 jobs in 2017 and 91,000 jobs in RoI alone by 2020. How could Brexit negotiations turn this on its head?
Brexit could have an impact, in either direction, but perhaps surprisingly it is not the driving factor in the long-term outlooks. Economies are made up of what consumers, businesses and governments spend, coupled with trade performance (exports minus imports). For each of these components of growth there are a long list of factors exerting an influence, of which Brexit is just one. There are competitiveness challenges facing both economies, Ireland is becoming very expensive in the Dublin area and housing supply is a growing concern. In Northern Ireland, pressures on infrastructure are also rising and, in both economies, skill shortages in key areas are already apparent. Without progress on these areas the outlook could be much weaker.
The sector most adversely impacted by the Brexit negotiations is agri-food and the final agreement as to what tariffs will apply across the vast range of products in this key sector is one area which could have a major impact on the job forecasts. Across the island, 19 out of 26 counties in Ireland and four out of 11 local authorities in NI, have more than 20% of their employment in agriculture on industry, it is in these locations that the largest direct Brexit effects could be felt. There could be job gains in professional and financial services jobs into Dublin from London, other firms may choose to open a presence either side of the border to ensure the ability to serve both markets and avail of whatever conditions benefit them best at a given time. As with any time of great change, there will be winners and losers, and the impact on job forecasts will become clear as the terms of Brexit are agreed.
What should businesses be looking for over the coming months to gauge economic conditions?
Critical to the economic outlook is whether pay can keep pace with inflation, so keeping an eye on earnings data and inflation is critical. Investment decisions are also important so watch investment agency announcements and look for cranes in the skyline. For consumers, look at car purchases and house sales as bellwethers for their economic health. These indicators matter much more than confidence measures, which are subjective. Look at what firms and people do not what they say they think they might do!
What do businesses and the government need to do to continue driving Ireland towards economic stability and growth?
A relentless focus on improving competitiveness is required. Brexit cannot become an all-consuming focus. There is a long list of ‘need done’ items. Tackling skills deficiencies and gaps, improving infrastructure (physical and digital), removing slowness and inefficiency in public service delivery, and planning and regulation are all factors that need urgent attention. Housing availability and cost in the Dublin area and congestion in the two capital cities on the island are also issues needing attention. Resolution on Brexit matters is critical and across the island, the nature of the border and the tariff position in relation to agri-food are the most significant matters.
Professor Neil Gibson is the Director of the Ulster University Economic Policy Centre. You can read EY's Economic Eye Summer Forecast here.