Crash-out Brexit hit to be ‘severe and immediate’, says Central Bank

Central Bank

The lending activity of Irish banks and access to credit for consumers and SMEs are unlikely to be adversely affected even in a worst-case Brexit scenario, the Central Bank has said.

The regulator said that while a no-deal Brexit could have a temporary impact on financial markets and result in some level of market dislocation, it probably would not lead to any large-scale constraints on consumer or commercial credit. It said the Irish banks would have sufficient capital and contingency plans to withstand even the worst-case Brexit outcome.

The Central Bank has, reiterated its expectation that sterling would drop by 10% — to around 96p-97p — against the euro, if a no-deal Brexit becomes a reality.

In its latest quarterly economic outlook, the Central Bank has stuck with its guidance for robust growth this year and next. But, that remains dependent on some sort of exit deal being agreed before Britain leaves the EU.

If a deal is agreed, the Central Bank sees Irish GDP growing by 4.2% this year —albeit marginally down on its previous forecast — and by 3.6% next year.

However, a no-deal Brexit would see the Irish economy grow only by somewhere between 1% and 1.5% in 2019 and 2020, it warned.

But, given the unprecedented nature of a disorderly Brexit, the Central Bank said “a good deal of uncertainty” should be attached to its estimates. A no-deal outcome would cause “severe and immediate” disruption to Irish growth and employment and affect all sectors of the economy, it warned.

Our analysis suggests that a disorderly no-deal Brexit could reduce the growth rate of the Irish economy by around four percentage points in the first year and by a further two percentage points in the second year.

“This would imply that while there would still be positive growth this year and next, it would be materially lower than in the central forecasts,” said the Central Bank’s director of economics and statistics Mark Cassidy.

Overall, the Central Bank said there remains no immediate risks of over-heating in the Irish economy, but said those risks will increase as the economy gets closer to full capacity.

Mr Cassidy also warned that not all threats to Irish growth are Brexit-related; pointing to the recent weakening in global economic outlooks.

“Ireland’s position as a small open economy, and the important role of multinationals within the economy, means the evolution of global economic and trading conditions and movements in major exchange rates will have an important bearing on Irish economic performance,” he said.

Elsewhere in its latest projections, the Central Bank said consumer spending should rise by around 2% both this year and next, but it said it expects spending to lag income growth going forward. It also sees the unemployment rate closing 2019 at 5.4% and falling to 5% by the end of next year. This, it said, will be helped by net inward migration remaining positive as more migrants pick Ireland in which to relocate instead of the UK.

Meanwhile, the UK has lost £6.6bn (€7.7bn) every three months since the 2016 Brexit referendum vote, new research from credit ratings agency S&P has suggested.

We estimate that, had the UK not decided to leave the EU in the 2016 referendum, its economy might have been about 3% larger by the end of 2018. That translates into average forgone economic activity of £6.6bn in each of the ten quarters since the referendum,” said S&P Global Ratings senior economist Boris Glass.

The fall in sterling’s value, triggering an increase in inflation, eroded UK household spending power, which S&P said would have been “considerably stronger” if the referendum had not happened.

“Uncertainty over the shape and form Brexit will take has increasingly paralysed any forward-looking decision making. This is reflected, in particular, in a contraction of business investment,” said Mr Glass.

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