Central Bank warns Brexit risks remain high

The Irish economy is weathering the first waves of the uncertainty caused by the Brexit shock but the outlook will worsen as hard trade barriers emerge from the EU-UK separation talks, the Central Bank has warned.

In its latest quarterly economic bulletin, it says increases in employment and consumer spending have nonetheless helped drive the domestic economy. The unexpected resilience of the UK economy since the vote in June to quit the EU has helped too, by sustaining demand for Irish exporters.

It nudged higher its forecasts for Irish GDP growth to 3.5% this year, and to 3.2% in 2018.

The message that more jobs and spending is boosting the economy’s recovery is a theme the Department of Finance will likely echo next week when it releases its latest economic outlook.

Other forecasters, including the Economic and Social Research Institute, have also hailed the expansion of the economy while warning about the risks of a hard Brexit ahead.

On jobs, the Central Bank warns the unemployment rate of 6.4% is likely not reflecting the bigger picture of the long-lasting effects of the economic bust that has left many underemployed and discouraged workers who have not been able to secure a job. It notes that half of the 203,000 new jobs created over the last five years have been taken by third-level graduates.

It states that although the early effects of Brexit have been “muted”, there is no escaping that Brexit risks are running high.

The outcome of trade talks will weigh on Irish firms “both in the short term and the longer term”.

The Central Bank wants the Government to plan conservatively for the country’s finances by putting aside reserves to safeguard an economy that is still carrying huge public and private debts from the crash.

So far, Irish firms that export into the UK have been hit by the slump in the value of sterling against the euro since the referendum.

Agriculture, footwear, and tourism will face the consequences of any barriers that emerge from the EU-UK trade talks.

Firms also face tougher competition at home as UK firms compete more aggressively with the benefits of a competitive currency.

“Over the longer-term, Irish firms will have to adapt to the post-Brexit environment,” says the Central Bank.

“In turn, as clarity about the post-Brexit world emerges, firms will have to develop new strategies to respond to the new configuration”, such as investing in the UK and seeking out markets beyond the UK.

Excluding construction, the number of jobs has already surpassed the 2008 peak. The Central Bank hails the widespread nature of the new jobs, with all 14 areas of the economy posting employment gains. That is all helping to boost underlying demand in the domestic economy.

Long term, Brexit and the “America first” trade pledges of President Donald Trump have ratcheted up the risks for exporters.

Central Bank chief economist Gabriel Fagan said the UK appears to be heading towards some sort of hard Brexit as the country turns away the single market.

Increased levels of foreign investments in Ireland would probably fail to offset the adverse effects. It is “very hard to see the upside” for the Irish economy emerging from Brexit, he said.