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Higher costs, fewer exports: The economic warning for Ireland in a no-deal Brexit

Ireland’s economy is performing strongly, the Central Bank says, but Brexit could slow things down considerably.

A view of the fragment of the Central Bank new HQ in Dublin’s Docklands.
A view of the fragment of the Central Bank new HQ in Dublin’s Docklands.
Image: SIPA USA/PA Images

THE CENTRAL BANK has published its economic forecast for how Ireland would fare in the event of a no-deal Brexit, as one of various possible scenarios that could happen after 29 March.

Among the most extreme effects of a no-deal Brexit as predicted by Ireland’s financial regulator are an “immediate disruption” in financial markets, higher costs and “further falls” in the value of sterling.

The Central Bank said that given that Brexit is “a situation that is without historical precedent”, there is considerable uncertainty around potential Brexit outcomes. In its latest quarterly update, it published an analysis of the possible effects of a no-deal Brexit.

It predicts:

A deterioration in economic conditions and a more adverse outlook which would cause firms to cut back investment and consumers to reduce spending.
Disruption to supply chains and the transportation of goods into and out of Ireland, disrupting production and leading to higher costs.
A reduction in Irish exports due to lower demand from the UK, higher tariff and non-tariff barriers (such as checks and paperwork) and exchange rate effects.
Consequences for the public finances as a result of weaker economic growth.
A reduction in economic growth (GDP) by up to 4 percentage points in the first full year. This would see GDP growth of around 1.5% in 2019 (a figure based on three quarters), meaning employment and growth still remain positive overall.

Over a 10-year period, the level of Irish output could be reduced by around 6 percentage points, though again employment and growth still remain positive overall.

The Central Bank said that it’s forecast would shift depending on when the UK leaves (there’s currently strong indications that there will be an extension); and a possible increase in foreign direct investment.

Preparations for Brexit

The Irish government’s and private businesses’ preparations for Brexit have been somewhat hampered as it’s not certain whether preparations should be for the EU-UK Withdrawal Agreement, a no-deal Brexit, or another unknown option.

The UK parliament voted against the Withdrawal Agreement last week; the opposition to it seem to be mostly to do with the backstop, which has drummed up staunch opposition from within the House of Commons.

If there is no deal, the EU has said that there will need to be basic checks between the EU and UK, which could include checking for animal documentation at the Irish border.

This would impact on farmers: many farming industries, such as the cheese production sector, is an all-island economy and could be delayed by a no-deal Brexit.

If the UK leaves the EU without a deal, this will mean that the British government will have to apply to adopt World Trade Organisation rules.

This will mean that tariffs, or taxes, will have to be introduced by the UK for goods being imported from the EU, and EU member states will do the same for goods being imported from the UK. These tariffs are set rates: for example dairy goods are at 35%, while car imports cost 10% of their value.

In response to the Central Bank’s forecast, Mark Cassidy, Director of Economics and Statistics, said:

“The economy is forecast to continue growing at a relatively solid pace, though this is expected to moderate in line with international economic output and where we find ourselves in the current economic cycle.

“However, a disorderly no-deal Brexit has the potential to significantly alter the path of the Irish economy in both the short and medium term, with a substantial and permanent loss of output.

That said, employment and growth are still expected to remain positive overall, while much work has been done to guard against the risks facing the financial system which the Central Bank overseas.

“Although Brexit continues to dominate headlines, we cannot ignore the other risks facing the economy, such as overheating and the international trade and taxation environment. Our ability to withstand any future downturns in the economy will be greatly enhanced by building up larger surpluses and buffers in the public finances now, especially if a no-deal Brexit can be avoided.”

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