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The impact of Brexit on the Irish economy

by Frank Schnittger Thu Mar 9th, 2017 at 11:32:33 PM EST

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 and 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 6.4% having declined from 15.2% in 2012. Total employment grew by 3.3% in 2016, participation rates are increasing and emigration has been reversed. GDP growth has been steady at 5.2% 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 125% in June 2013 to a projected 76% 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 locate 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.

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I think any predictions in this environment are more-or-less pointless. The uncertainty is just far too great. And the record of the predictions in a stable environment isn't all that good either.
by Colman (colman at eurotrib.com) on Mon Mar 6th, 2017 at 09:10:33 PM EST
But businesses have to plan for all eventualities and make investments in those they consider most likely. It's early days yet, but the facts appear to indicate that many UK businesses are planning to re-locate at least part of their operations within the EU, and for many, the Republic is the most obvious option.

It is also the job of Government to plan for the outcomes they consider most likely or most difficult and the consensus appears to be that Ireland must diversify its export markets further and attract what businesses it can from the UK. There will be casualties and opportunities.  The hard part is minimising the former and maximising the latter.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Mar 6th, 2017 at 09:18:58 PM EST
[ Parent ]
I'd guess there's about a 30-40% chance of an outlier outcome from Brexit ranging from super-duper cliff-edge expel-all-the-foreigners to sheepish abandonment of the whole idea. And a pile of stuff I can't even think of. There's pretty big error bars around the predictions.
by Colman (colman at eurotrib.com) on Mon Mar 6th, 2017 at 09:20:58 PM EST
[ Parent ]
Yes, and businesses hate uncertainty.  It plays havoc with budgets, sales forecasts, and investor guidance. So plans have to be made precisely to reduce the level of uncertainty.  Major businesses have to hedge their bets.  If even a small fraction of UK business investment ends up being invested in the Republic it could make a major difference to our much smaller economy. Equally, as you say, the whole thing could end up a bit of a damp squib, a bit like the millennium bug, but that won't be known until after a lot of precautionary investment has already taken place elsewhere.  The very fact that the precise shape and outcome of Brexit is so uncertain creates opportunities.

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Mar 6th, 2017 at 09:31:05 PM EST
[ Parent ]
i don't consider expel-all-the-foreigners an outlier at all, because it's already happening. People who have been living in the UK for decades, with jobs and families, are being forced to leave now.

Homeless people, widows/widowers, and the disabled, are having their benefits cut now. The NHS is being starved of cash now. Funding for regional development is being cut now. The media mostly support this, or don't particularly question it. The BBC has become a mouthpiece for our new imperial delusions.

The direction is obvious, and the only question is how far along the road to fascist slavery the country will go.

My suspicion is that the end-game is a hard-right violent coup which turns the UK into Zimbabwe-on-Thames - a paradise for a handful of billionaires and oligarchs, and hell on Earth for most of the population.

The real reason for the rush towards Brexit is that leaving the EU puts the UK outside of Europe's reach, and makes it impossible for the EU to intervene after the coup happens.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue Mar 7th, 2017 at 12:16:05 PM EST
[ Parent ]
I view what's currently happening as May's desperate attempt to get a net immigration figure around 100k, as promised, to appease mad back-benchers and tabloids. I don't think she has any long term plans worth speaking of.

Certainly the point of Brexit is to free UK oligarchs from EU overview.

by Colman (colman at eurotrib.com) on Tue Mar 7th, 2017 at 12:29:37 PM EST
[ Parent ]
I'm not even sure how important the EU is in all of this. The UK lacks a written constitution and a lot of basic rules are touched by EU treaties. This is golden opportunity for the fanatical right wing to change everything to their liking.
by generic on Tue Mar 7th, 2017 at 12:36:14 PM EST
[ Parent ]
Irish agriculture will, undoubtedly, be the hardest hit sector by Brexit. This poses a particular challenge for rural areas.  However Sterling devaluation, on its own, is already posing a challenge and the risk that the UK will do trade deals with Commonwealth or Latin American  countries to bolster its traditional cheap food policies means that much of that trade could be lost to third counties in any case. The challenge, for Ireland, is to find alternative markets in the far east, Russia, the middle east and other EU countries rather than try to cling on to a lost cause in the UK.  Naturally, that is not how Irish farming organisations see it at the moment:

Hard Brexit could almost `wipe out' UK food trade

The Irish Farmers' Association (IFA) has warned of a "virtual wipe out" in food exports to the UK if Britain opts for a "hard Brexit" and a reversion to World Trade Organisation (WTO) rules.

The IFA's chief economist, Rowena Dwyer, said such a scenario could see the introduction of punitive trade tariffs on Irish food exports to the UK, effectively rendering the trade uneconomic. She cited a recent report by the Economic and Social Research Institute (ESRI) which suggested a hard Brexit could see €1.5 billion wiped off the value of Irish meat exports.

Ms Dwyer was speaking at the launch of an IFA policy paper on Brexit which highlighted the sector's dependence on the UK market and the need for tariff-free trade access to the UK to be maintained.

The paper noted that the UK was the Republic's largest market for food and drink, accounting for 37 per cent of all food and drink exports worth €4.1 billion last year.

Disruptions to this market through the imposition of tariff barriers, border checks, certification requirements or other regulatory changes posed an unprecedented threat, it warned.



Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Mar 8th, 2017 at 04:57:42 PM EST
Russia wouldn't be an option, at least not as things stand, because Russia has banned food imports from the EU as a tit for tat measure against EU sanctions on Russia.
by Gag Halfrunt on Thu Mar 9th, 2017 at 12:01:20 PM EST
[ Parent ]
Yes but how long will the sanctions regime last with Trump and with everyone, effectively, accepting the Annexation of Crimea. The war in Syria seems to be grinding towards its end with Russia on the winning side, and even that seems to be in the process of being accepted by the west.

But I digress and agree.  It's not going to be easy to diversify markets quickly enough to make up for the loss of a large part of the UK market - even though we have been slowly reducing our dependency on that market for a long time now.  

I can't find a source, but my recollection is that as much as 70% of our exports went to the UK as recently as 1970.  It is now down to 13% and declining.  The problem is that it is a very labour intensive industry in the most challenged rural areas of the economy.  It will be difficult to create other employment opportunities there in compensation.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Mar 9th, 2017 at 12:28:12 PM EST
[ Parent ]
Well, I would be in heaven if a bit more Irish butter and cheese managed to make it over here to Japan.
by Zwackus on Fri Mar 10th, 2017 at 12:40:55 PM EST
[ Parent ]
I would agree about the butter. Grass-fed dairy, as with the Irish butter I buy at Walmart or the health food store, is well worth the 50% premium it commands on the basis of taste alone. In addition, the mix of omega oils in grass-fed dairy is healthy and it helps your HDL/LDL ratio. As with so much of agriculture, CAFO dairy is the problem, not the food intrinsically.
 

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Mar 10th, 2017 at 03:30:21 PM EST
[ Parent ]
Here, it's closer to a 300% premium, on top of already outrageously expensive prices for domestic butter.
by Zwackus on Thu Mar 16th, 2017 at 03:37:04 AM EST
[ Parent ]
You're still in Japan?
I'm in Maryland, not FL or the other cracker states. "Here" 1 lb. butter @ major chain grocers has been $4/lb (rounded, ex. sales tax) for a decade.

I often wonder what US dairy producers are complaining about.

Diversity is the key to economic and political evolution.

by Cat on Sun Mar 19th, 2017 at 06:51:51 PM EST
[ Parent ]
How about the price of guns in Maryland? Can you afford both guns and butter?

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Mar 19th, 2017 at 07:05:07 PM EST
[ Parent ]
Irish Economy gows by 5.2% in 2016
The figures show gross domestic product (GDP) accelerated 5.2 per cent in 2016, while gross national product (GNP) rose 9 per cent. The bigger GNP number reflects the profits associated with so-called redomiciled PLCs, which have relocated their headquarters here for tax purposes.

---snip---

Personal consumption, which accounts for almost half of domestic demand and ranks as the best indicator of local economic activity, rose 3 per cent. This tallies with the rise in employment and tax revenue evidenced in other indicators.



Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Mar 9th, 2017 at 04:55:05 PM EST
Ireland will never be "free" until its government sidelines the awful habit of exploiting entrenched dual-chartered exporters which curry EUR:GBP arbitrages. The UK City is a an anchor to which no other EU member is chained. EU 26 has made tremendous inroads with Asian AG markets, especially, while IR dallies.

Political and economic "affinity" with the Crown is inexplicable. The deeply entrenched colonial mindset of IR "elites" will take the ppl nowhere but corp tax arbitrage of corp transfer payments.

Defending AAPLE -- SRSLY?!

But, look: old news.



Diversity is the key to economic and political evolution.

by Cat on Mon Mar 13th, 2017 at 11:13:29 PM EST
2016 ireland exports to asia, US, SA

Diversity is the key to economic and political evolution.
by Cat on Mon Mar 13th, 2017 at 11:17:50 PM EST
[ Parent ]
Ireland will never be "free" until its government sidelines the awful habit of exploiting entrenched dual-chartered exporters which curry EUR:GBP arbitrages. The UK City is a an anchor to which no other EU member is chained. EU 26 has made tremendous inroads with Asian AG markets, especially, while IR dallies.

Political and economic "affinity" with the Crown is inexplicable. The deeply entrenched colonial mindset of IR "elites" will take the ppl nowhere but corp tax arbitrage of corp transfer payments.

Defending AAPLE -- SRSLY?!

But, look: old news.



Diversity is the key to economic and political evolution.

by Cat on Mon Mar 13th, 2017 at 11:13:57 PM EST
It's IE. IR is Israel.
by Colman (colman at eurotrib.com) on Tue Mar 14th, 2017 at 10:40:00 AM EST
[ Parent ]
I though IR was Iran....
by gk (gk (gk quattro due due sette @gmail.com)) on Tue Mar 14th, 2017 at 10:42:31 AM EST
[ Parent ]
You might be right.
by Colman (colman at eurotrib.com) on Tue Mar 14th, 2017 at 11:05:10 AM EST
[ Parent ]
Please accept my apology for that error.

Diversity is the key to economic and political evolution.
by Cat on Tue Mar 14th, 2017 at 02:39:56 PM EST
[ Parent ]
Likewise, AAPL.
Shoot me. Now.

Diversity is the key to economic and political evolution.
by Cat on Tue Mar 14th, 2017 at 02:40:47 PM EST
[ Parent ]
I consider a threat to Bailey's to be an act of war.
by rifek on Thu Mar 16th, 2017 at 10:09:58 PM EST


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