Ireland’s economy: Brexit and beyond

Sep 02, 2019
Annette Hughes, Director at EY-DKM Economic Advisory, takes a look at the current Irish economy and explains what it could look like if there is a disorderly no-deal Brexit on 31 October.

Our world leaders recently assembled for the G7 meeting in Biarritz to discuss global issues, such as the protection of the environment, the escalating trade war between China and the USA, and foreign policy. Ahead of the summit, it was described by President of the European Council, Donald Tusk, as a difficult test of unity and solidarity.

Meanwhile, the UK and the EU are working to find common solutions to issues much closer to home, notably Brexit. The last three years since the UK voted to leave the EU, without full knowledge of the consequences of an exit, have been very difficult politically and economically. Following a failure to reach an agreement by the 29 March 2019 exit deadline, the position now is that the six-month extension to the Article 50 process will expire on the 31 October 2019. If no other agreement is reached, the UK will leave on that date under a no-deal Brexit scenario.

Brexit and Ireland

Outside of the UK, Ireland will be the country most affected by Brexit. Yet, in the run-up to the October deadline, the Irish economy has been performing well. Following a better than expected outturn in 2018, with Irish GDP up by 8.2%, the Irish economy had a strong start to 2019, registering 2.4% growth in the quarter, and a year-on-year increase of 6.3% in Q1 2019. The star performance has been the labour market with a total increase of 45,000 jobs in the 12 months to Q2 2019 and annual employment growth of 2%, while the July unemployment rate of 4.6% is deemed to be close to full employment. As a result, there is limited spare capacity in the economy and upward pressure on wages continues. 

Exports

Exports increased by 10.4% in 2018 and by 13.8% year-on-year in Q1 2019. It is acknowledged that any shock as a result of Brexit will be transmitted to the economy through the traded sector, which includes the high-performing pharma and ICT sectors. This is because, as an open economy, a reduction in global demand would lower the level of exports over the long-term below what it would otherwise be in a business-as-usual scenario and, in turn, lead to lower levels of employment.

A discerning Irish consumer

Recent data relating to consumer confidence shows a more discerning consumer. The KBC Consumer Sentiment Index was at its weakest reading in July 2019 since November 2014. Other recent reports from the Bank of Ireland, MyHome.ie and Retail Ireland all point to an increasingly nervous and gloomier consumer concerning their purchasing mood, their expectations about property prices and their personal finances. 

Irish business sector

The business sector is also nervous, as the manufacturing Purchasing Managers’ Index (PMI) entered negative territory in June 2019, and the downward trend continued in July. Firms have cited the decline in production and new orders as the cause of this depression. 

The potential fallout from Brexit, whatever deal transpires, is expected to result in a level of Irish output below where it would otherwise be were the UK to decide to remain in the EU. While many businesses have taken a scenario-based approach, ranging from variations on an orderly soft-Brexit, including a free trade agreement with a deal, to a disorderly no-deal Brexit, there is no doubt that the recent narrative has shifted to the latter as we approach the October deadline. 

Ireland post-Brexit

A study from the ESRI and the Department of Finance (DoF) found that GDP in Ireland ten years after Brexit will be around 2.6% lower in a deal scenario, 4.8% lower in a no-deal scenario and 5.0% lower in a disorderly no-deal scenario respectively, compared to a situation where the UK stays in the EU. Within this aggregate position, certain sectors like agriculture and food, and areas such as the border regions, are expected to be disproportionately affected. In the short-term, the ESRI/DoF expect output to increase by 3.8% in 2019 and 3.2% in 2020 in a baseline, business-as-usual scenario, and by 1.2% and 2.4% respectively in a disorderly no-deal scenario. 

The Central Bank of Ireland (CBI) has projected that GDP growth for 2019 could be reduced from 4.4% to 0.4% and from 3.6% to 1.6% in a disorderly no-deal Brexit. The rate of growth in employment would also be severely impacted, and there may be some 34,000 fewer jobs compared to the employment that could be realised in the event of a no-Brexit scenario (i.e. business as usual) by 2020. However, the CBI does acknowledge that their assumptions around a disorderly Brexit are more severe than those made by the DoF and the ESRI. 

EY’s Brexit Lead, Simon MacAllister, has provided the latest deal probabilities, putting the likelihood of a no-deal Brexit at 55%, although he does expect there to be lots of developments in September.  Such an outcome would involve the imposition of World Trade Organisation tariffs, which would have negative consequences for consumers, businesses and ports across the island of Ireland. These consequences are likely to be significant, given Ibec and InterTrade Ireland’s recent comments about the low-levels of Brexit preparedness among Irish firms. 

Going forward

The next significant milestone from Government will be the forthcoming Budget on 8 October, which will need to be framed around the most likely scenario. The timing will not be great, just three weeks before the Brexit deadline – no mean feat for Minister Paschal Donohoe.