Transcript Brexit - IntertradeIreland

Brexit: a major challenge, full
of uncertainty
December 2016
John Fahey
Senior Economist
AIB
UK Activity holds up well post Brexit vote
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Widespread view that uncertainty caused by Brexit vote would see a marked slowdown in UK
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Currency depreciation and monetary easing support activity in 2016
GDP likely to be around 2.5% lower by end 2018 per both BoE and NIESR estimates
However, no sign yet of a marked weakening in activity
Retail sales, labour market, PMIs all hold up. GDP rose by 0.5% in Q3.
Economy may be in a Brexit “sweet spot” where it is benefiting from some positive effects but
the negative consequences yet to come through
UK economy in good shape
Economy still likely to slow in 2017/18
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Slowdown in economy still looks likely in
2017/18
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Uncertainty expected to curtail investment
in particular
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Rising inflation to hit real incomes and
depress consumer spending
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Clear signs already of sharp rise in output
prices which will feed into consumer prices
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Early signs also of a softening in the
property market, with mortgage approvals
at 18-month low
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Employment growth has slowed since the
vote for Brexit
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Historical experience in UK is that benefit
of weak sterling eroded over time, does not
resolve BoP deficit
Sterling takes a big hit on Brexit fears
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US$
Sterling / Dollar Exchange Rate
1.65
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1.55
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1.45
1.35
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1.25
1.15
Nov-14
May-15
Nov-15
May-16
Nov-16
Source: Thomson Datastream
Sterling weakened in lead up to the referendum and then fell
sharply on the result
Expectations of a ‘hard’ Brexit saw further sharp falls by sterling in
the autumn
EUR/GBP hits 2010/11 level of 90p, up from 70p a year ago...(GBP
fell €1.43 to €1.10 vs. Eur) GBP/USD down below $1.25 - 30 year
lows
Trumps win and rising political risks in Eurozone see sterling short
positions cut. Euro falls back to 85p
Risks remain for sterling, though, as exit talks with EU next year are
likely to prove difficult
Sterling could come under pressure again - euro may rise back up
to 90p on renewed hard Brexit fears
Political risks in Europe, though, may help limit the downside for
UK currency vs. Euro (€1.10-1.20 range ?)
Long, difficult Brexit process is only starting
Negotiation Process
• UK government wants to trigger Article 50 by end
March 2017, so likely to be H1 2019 when UK exits EU
• Indications from EU that talks on new trade deal can
only begin after UK leaves
Considerable Uncertainty
• EU leaders will want to preserve EU and not
create a precedent of an easy Brexit that other
countries could be tempted to follow
• Thus exit deal likely to contain only transition
arrangements on trade.
• Period of uncertainty could extend well into
next decade if real trade talks on commence
after UK departs EU
Migration vs Single Market
• Britain seems in denial about economic risks
posed by Brexit
• UK Government putting emphasis on regaining control
over immigration and return of full sovereignty so could
lose access to Single Market – hard Brexit
• UK has no veto on exit deal. EU leaders will
decide the terms
• EU strong on point that access to Single Market
requires freedom of movement
• UK Parliament could block an exit deal eg on
lack of access to Single Market
Key issues in future trade arrangements
UK Dependence on EU
Very close links between UK &
rest of EU, which takes 45% of
UK exports
FDI / City of London
Trade Deal Options
UK biggest recipient of FDI in
EU. London centre of European
financial services
UK puts sovereignty ahead of
retaining access to single
market – thus Norway and
Swiss type trade deals ruled out
by Prime Minister
Risk of Hard Brexit
Free Trade Agreement
Hard Brexit would see UK
leaving the EU Customs Union
and Single Market, while
current EU trade deals with
other countries would no longer
include UK
UK likely to seek its own FTA
with EU, but like Canada, it will
take years to negotiate, may still
not include services, still abide
by EU rules
WTO Tariffs likely in Hard Brexit
Membership of WTO
UK would need to negotiate full membership of WTO and begin
international trade talks with many countries, including EU
WTO Rules
No Trade Agreement /
access to Single Market
UK would have to fall back on WTO rules which require a common set of
tariff rates to be applied to all countries where no free trade deals exists
Tariffs
Applying tariffs raises prices, but low/no tariffs weakens position in many
trade talks
EU applies significant common external tariffs which would be levied on UK
exports in absence of trade deal
Brexit is a major headache for Ireland
• Brexit has serious implications given
close
economic/trade
links with
Trade
with UK equates
toUK
35%
of Irish GDP. Thus, it is a key
• Trade with UK equates to 35% of
Irish GDP.trading
Thus, it ispartner
a key trading
partner
•
UK takes 43% of Irish
UK takes 43% of Irish indigenous
indigenous
firmimportant
exports, so
firm
exports, so very
very important
trading partner
trading
partner
• Expected negative impact of Brexit
Expected negative impact of
on UK economy will have knock-on
Brexit
UK economy will have
effect inon
Ireland
knock-on effect in Ireland
• Agri, tourism, energy, retailing,
financial sector most likely to be
Sterling has fallen sharply on
impacted by Brexit
Brexit concerns, which will hit
exports to UK
• Sterling has fallen sharply on Brexit
concerns, which will hit exports to UK
• Also impacts Irish firms competing
with UK exports to Ireland and third
country markets
• Cross border trade likely to pick up as
shoppers head North following
sterling's big fall, while there will be a
significant impact on cross-border
businesses like hotels, restaurants
• Higher trading costs from more
administration, differing trade rules
and regulations, compliance costs,
possible customs duties and tariffs
when UK leaves EU
• Brexit could impact considerable
cross-country investment between
UK and Ireland.
• Border with Northern Ireland would
become an external EU land border
• Ireland will lose key ally within EU
when UK leaves as share similar views
on taxation, regulation, state
involvement in economy etc.
Brexit to curtail growth of Irish economy
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Recovery by Irish economy to continue
but Brexit will hamper pace of activity
Sharp fall in sterling also a major negative
for trade
UK economy expected to weaken on
Brexit which would also impact Ireland
Irish GDP growth to slow to 3.0-3.5% in
2016-19 period
ESRI-D/Finance estimates Irish output
would be almost 4.0 % lower over time if
there is a hard Brexit, with employment
2% lower and unemployment nearly 2%
higher
…and is also a major headache for Northern Ireland
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Could stifle the NI economy, become more isolated from Europe
Lose access to EU structural funds
Will limit benefits of reduction in Corporation Tax Rate if lack of full access to EU Markets and
will become less attractive to FDI
Severe blow for NI Agri-industry, as it would be excluded from CAP and could lose full access to
EU markets
EU is a key market for much of manufacturing industry in NI and so it would be badly impacted by
any disruption to trade
Negative impact on economy in Great Britain Would impact NI economy too as the two
economies move in tandem and Britain key market for NI firms
Slowing UK economy and pressure on public finances could impact level of funding to NI from UK
Exchequer
Northern Ireland would be the only external land border between EU and UK
Loosening of economic ties between the Republic and North – €3bn in cross-border merchandise
trade in 2015
Cross-border tourism, energy, trade and investment could all be impacted by Brexit
Although, weaker sterling boost to cross border shopping in NI
Brexit will also likely prolong low interest rate environment
Summary
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UK Government giving priority to immigration, independence and sovereignty
EU giving priority to preserving rules surrounding Single Market
No UK veto on Brexit deal which weakens its negotiating hand considerably
Clear risk of a hard Brexit that would see UK lose access to Single Market
UK may have to fall back on WTO rules which would require a common set of tariffs
Foreign investment, financial services, trade would be badly hit by a hard Brexit
UK Parliament may move to block an unfavourable Brexit deal
Real trade talks only likely to commence post-Brexit and will be long drawn out
UK economy to weaken on rising inflation, falling investment and uncertainty
Downside risks persist for sterling but watch political developments in Eurozone
Note: All Irish data in tables are sourced from the CSO unless otherwise stated. Non-Irish data are from the IMF, OECD and Thomson Financial. Irish forecasts are from AIB
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