The risk the UK will crash out of the EU at the end of next month has risen to “a significant 30%” but the most likely outcome is for a soft Brexit, according to a leading firm of economic forecasters.
Capital Economics in London predicts the UK parliament will delay the process of the UK exiting the EU and will agree “a softer Brexit later this year” following a period of what it calls “fudge and delay”.
However, signs of increasing uncertainty were reflected in sterling, which weakened against the dollar and the euro yesterday.
Despite its short and sharp selloff in the immediate aftermath of the series of votes in the Commons late on Tuesday, the UK currency has held up as analysts bet that the UK will strike some sort of deal.
“Following the parliamentary shenanigans in the UK on Tuesday, we have revised up our assessment of the probability that the UK leaves the EU without a deal to 30%. And we think a no-deal Brexit would shave about 2% from Ireland’s GDP over the next two years,” Capital Economics said.
Sterling also traded slightly lower against the euro, at 87.48p, as a number of UK manufacturing and consumer surveys suggested that Brexit was weighing on the British economy.
“The manufacturing PMI for January fell sharply, and there is a bit more evidence that firms are stockpiling. Consumer confidence in January stayed at its lowest level since 2013. And consumer borrowing growth fell to its slowest rate since 2014,” Capital Economics said.
The volatility of sterling is potentially costly for Irish exporters selling to the UK because firms’ profit margins can be wiped out as uncertainty about Brexit ratchets up.
Bank of Ireland chief executive Francesca McDonagh said the Brexit process had led to “an unprecedented time in Ireland’s history” and caused huge concern to exporters and importers.
Speaking to customers at an event in Cork, she said that the bank’s operations in the North and in the UK gave it an overview of the way Brexit was weighing on the Irish economy. And over half of Irish firms had put investment plans on hold, she said.
The Construction Industry Federation said it expects output to continue to grow this year even as Brexit uncertainties “no doubt cast a shadow on the construction industry”.
Jeanette Mair, economic and policy research executive at the business group, said construction output this year could grow by a “strong but moderate” rate of 6%.
Global stock markets continued to rally from their December slump as a US jobs report spurred more buying. The US Federal Reserve earlier this week had boosted investors who believe the US central bank will be slower in hiking interest rates.
“Earnings, a dovish Fed and a seemingly inexhaustible supply of new workers have all contributed to more gains for equity markets,” said Chris Beauchamp, chief market analyst at online broker IG. “
“Brexit has been banished to the background, thankfully, for the past few days, as tech earnings and the Fed dominated the headlines.
"Both the EU and the UK head into the weekend refusing to budge, but as has been noted many times before, the clock is ticking down to March 29. Something has to give, but it is far from clear that concessions from either side are forthcoming,” he said.