KBC Bank Ireland: Brexit ‘will not destroy growth’

Brexit will slow but not derail Ireland’s economic growth, KBC Bank Ireland has said in an update.

The fall in the value of sterling against the euro will have an immediate impact on the outlook here because it makes it more difficult for Irish firms to sell in the UK.

The bank has cut its estimate for underlying growth this year to 4% from 5% and pared its 2017 forecast to around 3% from 3.7%.

The long-term effects are hard to estimate.

“Our best guess is that a reasonably orderly exit process from the EU by the UK could subtract about 2% cumulatively from Irish GDP growth over a period of two to three years,” said KBC.

“While Brexit is not a ‘big bang’ event and, as such, seems unlikely to threaten a sudden stop in Irish economic activity, some significant effects on the Irish economy are likely to be seen through the second half of 2016, with a further impact felt before the end of 2017.

“Our expectations in regard to Brexit’s potential impact on the Irish economy primarily reflect the speedy and substantial weakening of Sterling because of the UK referendum vote and the implications of this reaction for Irish exports.

“Our forecasts also take into consideration the nature and extent of economic and cultural ties between the two countries that makes the UK decision closer to a ‘domestic’ rather than a foreign development. 

"The associated domestic focus on Brexit within Ireland means its repercussions are likely to feed through to sentiment and business decision-making reasonably quickly.”

KBC said that the huge revisions in 2015 GDP had exaggerated the improvement in public finances, with gross debt dropping to under 80%.

Nonetheless, it forecasts the economy can grow by an average 4% a year over the next few years.

On the CSO revisions, KBC said that “while we think there could be a marginally negative impact on 2016 growth numbers from last year’s outsized increase, it is also quite possible that there could be further developments of a similar nature that would act in the opposite direction- possibly in a substantive manner”.

“Our forecasts for the Irish economy reflect a view that the 2015 outturn was exceptional in nature and won’t have any consistent impact on prospective growth rates for future years,” the bank said.

KBC said its forecasts reflect “underlying trends in the Irish economy and abstract from the particular distortions that influenced the 2015 outturn”.

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