JIM POWER: Brexit threat looms large

The export sector is the lifeblood of the small open Irish economy and if this sector is doing well, then the whole economy tends to do well, writes Jim Power.

Of course, it is a bit of a misnomer to give it a single title, because the reality is that it is a very large and diverse sector that includes both goods and services; that varies from large multinationals to small indigenous companies and much in between; and which serves many different countries and different customers.

So far in 2017, the sector continues to do reasonably well, although growth has eased. In the first nine months of the year, the value of merchandise exports was 1.8% ahead of the same period in 2016.

Somewhat surprisingly, given the weakness of the UK currency, exports to the UK increased by 11.9%. The indigenous export sector is much more exposed to the UK, but it is holding up well in the face of the intense currency challenge.

Over the past two years, the UK currency has experienced a sharp downward correction. The weak trend commenced prior to the Brexit referendum in June 2016, but its weakness has been compounded by the chaotic political background that has prevailed since the momentous vote.

The background for the currency has been particularly poor over the past year. But, in such difficult circumstances, it has actually held up relatively well, and it could and probably should have fallen a lot further. It has been supported somewhat by a reasonably robust economy and an increase of 0.25% in UK interest rates in early November.

It is probably the case that exporters to the UK are using price to maintain competitiveness and market penetration in the face of very adverse exchange rate movements. It is questionable if this can remain a long-term strategy because the likelihood is that Brexit uncertainty and political chaos will ensure that sterling will remain a volatile currency.

The British market is not going to disappear, but it could become much more difficult in the event of tariffs being put in place. We also import a lot of food from the UK, so in the event of a hard Brexit, there will be scope for import substitution.

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