There have been many dire predictions of the negative impact of Brexit on the Irish economy, with exports to the UK already down by half a Billion or 4% in the last year with some Irish mushroom exporters going broke because their margins couldn’t survive the 10% devaluation of sterling that has already taken place. But the Irish economy is facing the twin challenges of Brexit and Trump from a fundamentally healthy position. Total exports to all markets rose by 4% to €117 Billion last year and UK exports, at 13% of the total, make up a continually declining part of total exports.
Unemployment is now 6.6% having declined from 15% in 2012. Total employment grew by 3.3% in 2016, participation rates are increasing and emigration has been reversed. Growth has been steady if not of Celtic tiger proportions, and has been gradually extending out of Dublin to many other areas and sectors of the economy. The public finances have improved dramatically with the budget deficit declining from 32% in 2010 to near zero this year, and with the debt to GDP ratio down from 120% in 2012 and 2013 to a projected 75% this year, although the distortions in Irish GDP created by Multi-National Corporations (MNCs) locating more of their intellectual property on their Irish balance sheets exaggerate that fall to some extent.
Trump’s proposed tax reductions for MNCs and threats to punish those who outsource some of their production and profits outside the USA may make it much more difficult for Ireland to attract and retain new FDI in the future. But it is Brexit which poses a more immediate threat with Sterling devaluation causing problems before any tariff barriers are even considered. The Economic and Social Research institute estimates the impact of a hard Brexit on the Irish economy at -4% of GDP, a 2% reduction in employment, and a 3.6% reduction in wages over a 10 year period. It has already reduced its growth projection for Ireland for 2017 from 3.5% to 3% as a result.
One of the fallacies of the Brexit debate in the UK has been the emphasis on the short term economic impacts of Brexit and the claim that the UK’s relatively robust performance over the last few months somehow refutes the more pessimistic prognostications. However forecasts for UK GDP growth are in the 1-2% p.a. range, broadly similar to those for the EU, and some way below projections for US and global growth of c. 2.4 and 3.6% p.a. respectively. It is unclear whether the UK is doing anything more than participating in a global uptick in growth despite the fact that devaluation has given the UK economy a short term boost to its competitiveness, and looser monetary and fiscal policies have been adopted in the wake of the Brexit referendum.
It goes without saying that Brexit hasn’t actually happened yet, and all we may have seen to date is the impact of those policies counteracting any consumer and investor confidence issues which might otherwise have arisen in the wake of the referendum result. It takes time for companies to reconsider their investment plans, and all the indications are that major players with large scale imports and exports from/to the Single Market are considering their options in relation to maintaining access to the Single market post Brexit. Apparently, British firms have registered 100,000 new companies in Ireland in the last year as a hedge against worst case scenarios for Brexit.
Most attention to date has focused on the major Banks considering re-locating part of their EU operations in Dublin or in other EU financial centres, but similar considerations apply to small and medium manufacturing firms which could be hit by tariff barriers. The impracticalities of a hard border in Ireland are also receiving considerable attention, with the cream used to manufacture Bailey’s in Northern Ireland mostly originating in the Republic and crossing the border several times at different stages of the manufacturing process.
Brexit drives registration of 100,000 UK firms in Ireland
One of Northern Ireland’s largest manufacturers told MPs it made a decision within two weeks of the Brexit vote to build a factory across the Border in Dundalk. The Craigavon-based Almac Group, a pharmaceutical group employing 2,600 people, said its worldwide clients wanted to know what regulatory regime would be in place after Brexit.
“They wanted to know what was our EU solution going forward. We had to address that,” Almac executive director Colin Hayburn told the committee. “We needed an EU presence immediately to satisfy those customers.”
The Dundalk operation will employ 100 people within two years, he predicted, though its manufacturing operation will not move out of its Armagh home.
Undoubtedly, many of those companies may never amount to anything much, and in the short term one can surmise that British companies will do the minimum required to retain access to the Single Market. However as regulatory requirements are tightened many may end up having to locate considerable operations within the EU in order to maintain market access and the Republic, as the only remaining major English speaking member of the EU and with a similar common law based legal system is well placed to benefit. The advantage of attracting smaller and manufacturing operations to the Republic from an Irish point of view is that they can be located in smaller towns throughout the Republic widening the skill base required and avoiding further over-heating of the Dublin office space, residential property and skilled financial/IT labour markets.
Of course a lot depends on what Brexit deal is ultimately negotiated and what tariffs and non-tariff barriers may ultimately be applied. My view, that only a minimalist Brexit deal, if any, will be agreed, is slowly being shared by a wider and wider circle of commentators. If, as I suspect, a trade war ultimately breaks out because the UK refuses to settle it’s outstanding bills with the EU and ever greater Sterling devaluation makes EU goods and services increasingly uncompetitive with their UK counterparts, then it will become imperative for any British firm depending in large part on access to the Single Market to re-locate at least part of their operations within the EU. The Republic is making every effort to capitalise on any opportunities this may give rise to in compensation for the loss of direct trade with the UK which is sure to arise.
A hard border with N. Ireland will also only exacerbate the differential rates of growth north and south of the border resulting in greater tensions within Northern Ireland and this is not helped by the cavalier attitude of the UK Parliament. The House of Commons voted on the 9th. of February to defeat by 327 votes to 288 an SDLP motion that the Belfast (Good Friday) Agreement be taken into account when triggering article 50. They will reap a bitter harvest from that decision.