There is no good outcome for the Irish economy from the UK’s decision to exit the EU, the Central Bank has warned, with indigenous firms likely to be in the frontline for years to come.
Since the outcome of the June 23 vote, Government and think tanks have been reluctant to estimate in any detail the potential costs that the UK exit could impose on Irish firms.
The British market is significant for Irish firms because many firms in the agri-foods, clothing, footwear and tourism industries employ disproportionately more people than the multinationals exporting across the Irish Sea.
The Central Bank yesterday became the first institution to quantify the fallout for economic activity, bluntly saying that Brexit created “a particular exposure for the Irish economy”.
Chief economist Gabriel Fagan also said that under the circumstances the wisest approach for policymakers despite the huge revisions to GDP levels was to stick to current spending and budget-reduction targets.
The bank does not recommend providing special incentives to offset the effects of Brexit.
In its quarterly economics bulletin, it said Brexit would hit Irish firms — in particular by curtailing exports — and economic activity would be lowered in both the short and long-term.
The bank said Brexit would immediately shave 0.2% from Irish GDP levels this year.
That effect would be amplified, with the level of GDP next year falling by a “significant” 0.6% below what it should have been if the UK had voted to stay in the trading bloc.
The bank outlined the impact would first likely come from the slump in the value of sterling, amid other effects which contribute to uncertainty.
The longer it takes for Britain to strike a deal with European capitals over its new trading relationship the greater the risk for the Irish economy.
“Under the most adverse scenario, where increased tariff and non-tariff barriers significantly reduce trade flows between Ireland and the UK, the level of Irish GDP could be over 3% below a no-Brexit baseline after ten years,” said the bank.
“Adverse exchange rate movements together with a negative shock to foreign demand will reduce Irish export growth.
"Heightened uncertainty and financial market volatility in advance of formal UK exit negotiations could weaken investor and consumer confidence,” it said.
For Ireland, the best outcome would be if Britain negotiates membership of the European Economic Area, which “would largely mimic” its current trading relationship with the EU.
The worst outcome would be if Britain struck bilateral deals under the auspices of the World Trade Organisation where “there is likely to be a marked negative impact on UK trade and investment which in turn leads to a significant negative impact on the European economy and on Ireland in particular.”
Despite lowering its projections, the Central Bank still forecasts the economy will grow 4.9% this year, and expand 3.6% in 2017.
That’s because the Brexit is seen affecting exports, while consumer demand here is expected to rise at a good clip.
On the GDP revisions, the Central Bank said it will work with the group set up by the CSO to devise a new measure of economic activity for Ireland, which strips out the huge distortions created by multinationals registering in Ireland.
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