Sterling decline is bad for Ireland; a 'no deal' Brexit even worse

A “no deal” outcome in Brexit negotiations would not come as a shock to anyone, but would represent the worst possible outcome for Ireland, argues Jim Power. 

In recent weeks, sterling has stabilised on the foreign exchange markets and has hovered around 89 pence against the euro.

That’s good because the UK currency going into free-fall is exactly not what the Irish economy needs, and a few short weeks ago it was threatening to do just that until a Bank of England official hinted at the possibility of a UK interest rate increase in the face of rising inflation in Britain.

That helped stabilise and add modest strength to the currency which has been sustained in recent weeks. However, despite the stabilisation of recent times, the UK currency is still trading at dangerously low levels from an Irish perspective.

Back in 2015, the exchange rate relationship averaged 72.6 pence; in 2016, it averaged 81.9 pence; and to date this year, it’s on an average of 87.4 pence, after trading as high as 93 pence.

This represents a significant deterioration in Ireland’s competitive position vis-à-vis the UK.

To date, the negative effects on the Irish economy have been relatively muted, but still quite real.

The latest overseas visitor numbers for the first nine months of the year show that overseas trips to Ireland increased by 2.9% to reach 7.66m. This is setting us up for a record year.

Visitor numbers from North America increased by 18.6% and by 3.5% from Europe excluding the UK. Visitor numbers from Britain accounted for 36.7% of total overseas visitors, but this is down from over 41% a couple of years ago. So far this year, the number of visitors from Britain has declined by 6.7%.

But luckily for Irish tourism, the North American market is booming though any further weakening of the dollar could become a source of concern. It is currently trading above $1.18. Sterling weakness is making Ireland much more expensive for UK visitors and this is being reflected in UK visitor numbers. Hopefully, the same situation will not arise for US visitors, and with President Donald Trump at the wheel, who knows what might happen to the dollar.

Sterling weakness is also being reflected in the motor trade. In the first nine months of the year, 70,821 used cars were imported, mainly from the UK on the back of the currency. That’s 37.7% ahead of the first nine months of 2016.

Used car imports are displacing new car sales and as a consequence new car registrations in the first nine months of the year totalled 128,512, which is down 10.2% on the same period in 2016.

This is obviously causing problems for the motor trade, but it is also hitting the bottom line of the Revenue Commissioners. In the first nine months of the year, the average tax take from a new car was €9,020 and was just €3,187 from a used car.

On the export front, the impact of sterling weakness is less obvious. The latest merchandise trade data show that in the first eight months, exports were 2.9% higher than last year, but surprisingly, exports to the UK recorded growth of 11.6% in value terms.

This appears to defy logic but, clearly, Irish companies are squeezing margins to maintain market share in the UK. This cannot be a long-term strategy and one would have concerns about what might happen in the longer-term if current sterling weakness persists, or indeed if it got even weaker.

It is, of course, impossible to predict where sterling will go from here, but the risks to the downside for the UK currency look real.

The UK political situation remains quite dysfunctional and it is no surprise the first stage of the Brexit negotiations are still failing to reach a conclusion.

The UK prime minister is in a very weak position and her ministers are not exactly covering themselves in glory. Boris Johnson and David Davis come to mind immediately. There are some signs that the prime minister may be starting to approach some sort of compromise and that her relationship with Germany’s Angela Merkel is improving. However, any compromises will not go down well with some of her senior party members.

Of course, anything is now possible, but an eventual “no deal” outcome would not come as a shock to anyone, but would represent the worst possible outcome for Ireland.