Oliver Mangan: Trade deal or no deal, trading with Britain will become more difficult next year
Agreement in the EU-UK trade talks is still proving elusive as the clock ticks down towards the end of the transition period at the end of the month.
The talks are continuing but difficult issues remain to be resolved which means governments and businesses still must prepare for a possible hard Brexit involving trading in goods under World Trade Organization rules and the imposition of tariffs on some products.
Trade in services will also be hit by the UK’s departure from the single market and some effects will arise even if there were a trade deal.
Economic growth can be expected to be significantly lower in the UK and Ireland over the next couple of years in such circumstances.
This follows a year when the world economy has endured a very deep recession. It is now estimated that the UK economy will decline by more than 11% this year.
Irish GDP fell 6.5% in the first three quarters of 2020, not as much a feared but still representing a major contraction. As the vaccines are rolled out, growth is expected to rebound strongly in the UK and Ireland next year.
However, a hard Brexit would dampen the pace of recovery significantly and most forecasts assume the Irish economy will grow by around 5% next year, assuming there is a trade deal, and by 2.5% or 3% in the event of a hard Brexit.
Sectors and businesses that are heavily reliant on sales into the UK market would be most severely affected in terms of higher costs, a lower sterling and a weaker British economy.
The agri-food industry is front and centre, with many agricultural goods likely to attract tariffs.
The tourism sector could also be hit if sterling depreciates sharply, as happened after the Brexit referendum in 2016, discouraging British tourists to travel across the Irish Sea.
Whether there is a trade deal or not, trading with the UK will become more difficult next year.
In total, the UK takes close to 40% of indigenous Irish exports and much of the retail sector here is also very closely interlinked with the UK for supplies.
Much of the retail sector here is also very closely interlinked with the UK for supplies and in terms of ownership. There will be more paperwork, increased administration costs, and possible delays at ports.
However, it has been over four years since the Brexit vote and it has been clear for some time that the UK will leave the customs union and single market at the end of 2020.
It is not like the Covid-19 shock which came as a bolt out of the blue. The Irish economy should be able to cope reasonably well if the hardest of Brexits is avoided through a trade deal.
Indeed, on a medium-term basis, there could be benefits for Ireland as it will become an even more attractive destination for foreign direct investment, with its main rival the UK, completely outside the EU single market and customs union.
- Oliver Mangan is chief economist at AIB
