The harder the Brexit, the worse for Ireland

http://www.theguardian.com/world/2016/oct/16/harder-brexit-worse-for-ireland-sterling-fall

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For Ireland, the move to Brexit brings two economic threats: clear short-term risks and huge uncertainty about the future.

Above all, the problem in the next year or two will be volatility – in currency markets, confidence, trade and investment. Beyond that, who knows, though the rough rule for Ireland is the harder the Brexit, the worse the outcome.

Government forecasters and private sector economists have crunched the numbers. The official GDP growth forecast for next year has been cut by half a point to 3.5%, though the sums were done before sterling’s latest fall. The rough guide is that every 1% cut in UK growth hits Ireland by 0.3-0.4%.

But all sides concede that the many uncertainties of Brexit could lead to more damage. A landmark study by the Economic and Social Research Institute last year warned that Brexit could reduce bilateral trade flows between Ireland and the UK by 20% or more in time. Looking at the island of Ireland, the ESRI pointed out that the Irish Republic was a more important market for Northern Ireland than vice versa.

Beneath the numbers lurk the great uncertainties. What will Brexit mean for UK growth, a vital factor for Irish exporters? Can sterling fall much further? How will Britain’s talks with the EU affect the terms on which Ireland trades with Britain and, perhaps most importantly, the common travel area that allows free movement of people?

“Words like ‘paradigm shift’ sound very hackneyed but in my career in business it is hard to imagine anything so pervasive and critical,” said Feargal O’Rourke, managing partner of advisory company PwC. “And one of the key issues is that the scale of the uncertainty makes planning very difficult.”

Standard economic models suggest a loss to Irish GDP of between one and three percentage points after a decade, depending on the new trading arrangements, according to Alan Ahearne, economics professor at NUI Galway.

However, he warned that disruptions to trade, particularly from new regulations and any reinstatement of the border on the island of Ireland, were the kind of factors often underestimated by standard forecasts.

The immediate focus is sterling. If the pound heads for parity with the euro (it has fallen to about €1.10 from above €1.40 a year ago), a big challenge will become a crisis. Firms are already going bust, and Irish manufacturers exporting food to Britain are feeling the crunch.

“The collapse in sterling is already being felt in the low-margin agri-food sector in particular,” said Dermot O’Leary, chief economist at Goodbody Stockbrokers. “With further downsides remaining for sterling, the pain is likely to worsen.”

And the fall in sterling has other immediate impacts. Shoppers are starting to cross the border again into Northern Ireland, particularly for big ticket items. Online sterling purchases by Irish shoppers are soaring.

There are also repercussions in the other direction. One Belfast woman who booked her wedding reception in Donegal has seen the sterling cost rise from £20,000 to £23,000 in a couple of weeks.

Northern Ireland faces a similarly glum outlook. Growth predictions have been slashed, with one forecaster cutting the outlook for next year to 0.5% growth, from 1.9%. The other big threat to the north’s economy is the potential loss of EU subsidies, particularly in the farming sector but also in support investment.

The second big economic question centres on trading arrangements after Brexit: will there be tariffs applied on trade between Britain and Ireland? This could be ruinous, particularly for farmers who rely on the UK market to sell their products.

But the third factor is the most emotive. If a border is reinstated on the island of Ireland it will be seen as a step back in time to the days of the Troubles – and a massive blow to the economic and social relationship that has been built in recent years. There are an estimated 14m crossings of the border each year, a vital conduit for business, tourism and daily life – and for business supply chains.

For the Republic there is also the wider issue of the future of the free travel area covering all of the UK, with Westminster tightening immigration controls. The UK labour market has traditionally acted as a destination for Irish emigrants, particularly at time of high unemployment. An estimated 400,000 people who were born in the Irish Republic are resident in the UK.

Set against this, the upside looks thin. Yes, some businesses could migrate from the UK to Ireland, though Dublin looks unprepared for this, particularly in terms of available property. Ireland may also gain from foreign direct investment that would otherwise have gone to Britain.

O’Rourke of PWC believes EU companies could choose Ireland over the UK to avoid tariff barriers. Furthermore, companies could choose to manage more of their supply chains from the Republic, given the potential complications and costs of moving goods through the UK.

There will be years of working out a new trade deal, and the uncertainties are unlikely to lift in the meantime. It is impossible to run this through any economic model. There are simply way too many variables. The simple rule of thumb is that for Ireland, the harder the Brexit, the bigger the risks. Irish former finance minister Ruairí Quinn said last week that this was the biggest crisis faced by Ireland since the outbreak of the second world war.

Cliff Taylor is business editor of the Irish Times