Central Bank warns no-deal Brexit could cut economic growth to 1.5%

By Business & Finance
25 January 2019

Economic growth is still expected to slow, even in a smooth Brexit scenario, given the advanced stage of the current economic cycle and the more uncertain international economic environment

The Central Bank of Ireland has published its first Quarterly Bulletin of 2019. The Bulletin examines recent trends in the domestic economy and provides the Central Bank’s forecasts for the Irish economy and its views on domestic economic policy issues.

The Bulletin reports:

  • Economic growth expected to be 4.4% this year, moderating to 3.6% in 2020.
  • Further declines in the unemployment rate to 4.9% and 4.7% are projected for 2019 and 2020.
  • Compensation per employee is forecast to increase by 3.4% in 2019 and 3.6% in 2020.
  • Inflation is projected to pick up moderately. Current assumptions point to a forecast of 0.8% and 1.3% for HICP inflation in 2019 and 2020.

Forecasts for impact of Brexit

The central forecasts presented in the Bulletin are based on a transition period coming into effect on 30 March when the United Kingdom is due to leave the European Union. Given the unprecedented nature of Brexit, a situation there is uncertainty around potential Brexit outcomes, but the Central Bank published analysis of the possible effects of a disorderly ‘no-deal’ Brexit. The possible outcomes include:

  • Immediate disruption in financial markets, as well as further falls in the value of sterling which would adversely affect the competitiveness of Irish exporters
  • A deterioration in economic conditions and a more adverse outlook which would cause firms to cut back investment and consumers to reduce spending
  • Disruption to supply chains and the transportation of goods into and out of Ireland, disrupting production and leading to higher costs
  • A reduction in Irish exports due to lower demand from the UK, higher tariff and non-tariff barriers (such as checks and paperwork) and exchange rate effects
  • Consequences for the public finances as a result of weaker economic growth
  • A reduction in economic growth (GDP) by up to 4 percentage points in the first full year. This would see GDP growth of around 1.5% in 2019*, meaning employment and growth still remain positive overall
  • Over a 10 year period, the level of Irish output could be reduced by around 6 percentage points, though again employment and growth still remain positive overall.

Mitigating factors could improve the outlook of Brexit

Some mitigating factors that might improve the outlook of a disorderly exit. These include extending the UK’s exit date, which would allow firms and households more time to prepare, and a potential increase in foreign direct investment that might otherwise have been destined for the UK. Furthermore, in the financial services sector, substantial preparatory work has already been undertaken to mitigate the most immediate and material “cliff edge” financial stability risks.

In the event that a disorderly Brexit scenario can be avoided, the Central Bank continues to urge fiscal prudence in light of other risks on the horizon, such as the unpredictability of corporate tax revenues. As the economy moves closer to full employment, there is also a need to continue to guard against the risk of overheating. On the external side, in addition to Brexit, the international economic outlook has weakened since the last Bulletin, while risks related to international trade and taxation persist.

Mark Cassidy, Director of Economics and Statistics, said:

The economy is forecast to continue growing at a relatively solid pace, though this is expected to moderate in line with international economic output and where we find ourselves in the current economic cycle.

He continued, “However, a disorderly ‘no-deal’ Brexit has the potential to significantly alter the path of the Irish economy in both the short and medium term, with a substantial and permanent loss of output. That said, employment and growth are still expected to remain positive overall, while much work has been done to guard against the risks facing the financial system which the Central Bank oversees.

“Although Brexit continues to dominate headlines, we cannot ignore the other risks facing the economy, such as overheating and the international trade and taxation environment. Our ability to withstand any future downturns in the economy will be greatly enhanced by building up larger surpluses and buffers in the public finances now, especially if a no-deal Brexit can be avoided.”

*Based on impact over three quarters (April-December 2019).