It's your Mortgage Day!
This piece, published in the Sunday Independent on January 20th, echoes the Central Bank's warning as to how different economic conditions may be in 2019 depending on whether it’s a 'deal' or 'no deal' Brexit but it differs from the Central Bank analysis in that it argues that a 'soft but not smooth' Brexit will have some negative economic impacts.
What picture will we remember at the end of 2019? Will queues be for bread or for houses? Will we be talking about shortages of medicine or workers? Will the economy fly or could planes be grounded? In short, will this be a year of pain or prosperity? The answers depend critically on which of two paths the Brexit process takes.
Brexit is the immediate, ‘unclear and present danger’ facing the Irish economy. Less than ten weeks from the scheduled departure date, the nature of the UK’s future relationship with the EU and the time and manner in which this will change is entirely unclear. This makes it is almost impossible to predict the precise impact Brexit may have on the Irish economy in the year ahead.
Whatever form of EU exit the UK takes, its departure is likely to have some negative impact on the Irish economy. Equally important, circumstances for individual firms and households could vary markedly as Brexit threatens an uneven range of gains and losses across businesses and geographic regions of the country. Frustratingly, at this late stage, the ability to say when Brexit pain is likely to be felt, how severe it might be, what areas will suffer most and where offsetting gains may occur is extremely limited.
If, sooner or later, some form of the draft deal between the UK and EU is agreed by the UK parliament, the likelihood is that economic ties between the UK and Ireland will remain relatively close and the transition to new structures will not take place for two more years. In such circumstances, any Brexit impact in 2019 will be limited. There could even be a small and temporary ‘relief’ bounce in sentiment and spending.
An orderly and slow Brexit might shave well under 1 percentage point off Ireland’s near term growth (Note in this regard KBC forecasts differ from the latest Central Bank estimates in that they explicitly assume that a 'soft but not smooth' Brexit will through uncertainty here and in the UK impose costs on activity). This would reflect a more cautious approach to spending on the part of households and firms some alteration to supply chains and, most importantly, poorer prospects for exports to the UK, but these developments wouldn’t prevent healthy gains in activity and employment. This soft but not entirely smooth Brexit is envisaged in KBC’s current forecast of solid Irish GDP growth of 3.5% in 2019.
Alternatively, if the UK ‘crashes out’ of the EU in March 2019 without a transition deal or some significant agreement on trading relations, this would represent a sudden and severe shock to the Irish economy. As the disruptive effects would be front-loaded into 2019, this year would bear much of the burden of adjustment and, consequently, much of the hit to activity and employment in the event of a ‘no deal’ scenario.
My strong view is that even with some offsetting domestic policy measures and support from the EU, the adverse short term impact of a ‘no deal’ outcome is likely to be a significant multiple of that of a more orderly separation. My tentative estimates suggest that a ‘disorderly’ Brexit could cut Irish GDP growth for 2019 two to three percentage points.
Given current momentum and the possibility of offsetting actions at national and EU level, it seems likely that Irish GDP growth in 2019 would still be positive but possibly only marginally so in the event of a ‘no deal’ Brexit. A similarly weak outturn could be envisaged in 2020. Such an outcome would also produce marked variations in sectoral and regional conditions with border areas and sectors such as agri-food particularly exposed.
To date, there has been little evidence of a material ‘macro’ hit to the Irish economy from Brexit related developments. Indeed, weak sterling has weighed on Irish consumer prices and boosted household spending power. Although merchandise exports to Britain and tourism revenues from the UK have underperformed, they haven’t collapsed. Whiles some sectors and areas faced serious problems, a generally healthy Irish economy meant these didn’t spill over into generalised weakness.
The best barometer of the continuing health of the Irish economy is sustained strength in employment. However, slower jobs growth of late partly reflects increased caution on the part of business as companies consider a weaker global growth outlook and an imminent but increasingly unclear Brexit.
The particular weakness of employment in the border area – the only region to record falling employment in the past two quarters – could also be a reflection of its particular exposure to Brexit/sterling weakness. Similarly, the softer tone of the KBC Bank/Chartered Accountants Ireland business sentiment index for the third quarter hints that some companies were implementing a precautionary pause in hiring related to ‘crash out’ Brexit concerns.
In the same vein, households are now more nervous about Irish economic prospects than at any time for the past five years. According to the latest KBC/ESRI consumer sentiment reading, just one in four consumers expect a stronger Irish economy over the next twelve months while one in three think conditions will weaken in the year ahead. If this translates into a more cautious approach to spending, it will further weigh on the outlook for growth.
Until now, there has been little indication of widespread Brexit related effects in the Irish housing market. However, growing concerns about the UK crashing out of the EU in early 2019, could weigh on property prices and transaction volumes in coming months.
In more likely scenarios where a disorderly Brexit is avoided, any related adverse effects could be modest and short-lived. Indeed, if we see a ’soft and smooth’ Brexit, renewed optimism about Irish economic prospects could see a slight ‘Brexit bounce’ in Irish property prices later in 2019.
In summary, Brexit makes this the perfect time for two handed economists – 2019 looks set to be a year in which the Irish economy either stays strong or struggles. Unfortunately, at this point even a one handed economist might find it hard to point towards which path lies.
This non-exhaustive information is based on short-term forecasts for expected developments in the economy and financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalised investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a judgment as of the date of the report and are subject to change without notice.