A no-deal Brexit would immediately weigh heavily on Irish economic growth and see sterling depreciate by around 10% against the euro, the Central Bank has warned.
Ireland, in GDP terms, is only likely to see growth of around 1.5% this year if Britain crashes out of the EU without finalising a workable trade deal, the Central Bank said in its latest quarterly economic bulletin.
However, the regulator stressed this is a “scenario” and not a forecast as it still expects a trade deal to be ratified between Britain and the EU.
Its official forecast, assuming a deal is secured, is for the Irish economy to continue growing “at a relatively solid pace” before moderating in 2020.
It said GDP should grow by 4.4% this year and by 3.6% in 2020.
The international economic outlook has weakened since its last bulletin, it said, with risks related to international trade and taxation persisting.
Even in a smooth Brexit scenario economic growth is expected to slow, given the advanced stage of the current economic cycle and growing international economic uncertainties.
“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,” the regulator’s director of economics and statistics Mark Cassidy said.
A no-deal Brexit would also see a reduction of around six percentage points in Irish economic growth over 10 years, the Central Bank said.
Weaker growth would damage the public finances; lower demand from the UK would lead to a reduction in Irish exports; supply chains would be disrupted and companies would cut back investment; while consumers would reduce spending, and be faced with higher prices, it said.
Consumer spending, however, should grow by around 2% both this year and next.
The Central Bank sees employment growth of 2.2% this year and 1.7% next, with the unemployment rate reducing to 4.7% by the end of 2020.
However, Mr Cassidy said a no-deal Brexit would negatively affect the jobs market, albeit at a slower rate than overall economic growth.
When asked, he said he wouldn’t put a probability rating on a no-deal Brexit happening, but admitted the possibility is coming more into focus as March 29 comes closer.
Mr Cassidy also said the Central Bank’s fear of the Irish economy overheating has not increased in recent months, but that broad concerns remain.
“We don’t see any overheating at present, as domestic prices and wage levels are being maintained, but we are getting closer to full capacity [in the economy],” he said.
“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,” Mr Cassidy said.
“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,” he said.
However, he said a reassessment of future government taxation and spending policies would be necessary in the event of a no-deal Brexit.