Irish Economy – Brexit to result in downgrades for Ireland

referendumWhile the last of the votes have yet to be counted, it is clear that the Leave side is set to prevail in the UK’s EU referendum with c. 52% of the vote. This event will cause considerable disruption in financial markets today – overnight sterling fell by as much as 11% and 8% against the dollar (bringing cable to levels last seen in 1985) and euro respectively; gold is +6%; and the US 10 year yield fell by as much 33bps, bringing it back to levels last seen during the financial crisis. At the time of writing FTSE 100 futures suggest an 8% drop at the open.

 

6a00d83451b31c69e2017d407cfa11970cIn the days leading up to the vote markets had moved to price in a win for the Remain camp (betting exchanges had suggested a 92% probability of a Remain win yesterday afternoon), so some of the above moves reflect the asymmetric risks produced by that positioning. Nonetheless, a clear ‘risk off’ bias is understandable (and warranted, given the uncertainty produced by the referendum result).

 

This development is unambiguously negative for the Irish economy. With a sixth of total Irish exports (and more than 40% of exports from indigenous firms) going to its nearest neighbour, Ireland was a far from disinterested observer of this process. Our house view was that in the event of a Leave win that sterling could fall to 83p and it briefly broke through that level overnight. We see further downside to 85p over the rest of the year. This is a real headwind for Irish exporters and we note that the ESRI’s Hermes Model had previously forecast a possible adverse hit to Irish GDP relative to baseline in the range of 0.5-1.6% over two years in the event of a so-called ‘Brexit’ due to a combination of a weak pound and wider spill-over effects in the global economic environment.

 

BIMC-MASTER-British-Isles-Mini-CountriesIt is difficult to forecast the longer-term impact on the Irish economy from a Brexit, as this is highly contingent on the trade arrangements struck between the UK and the rump-EU, but for what it’s worth the range of estimates suggest that Irish per-capita GDP could be between 0.8% and 2.7% lower by 2030 than would have been the case under a ‘Stay’ outcome. Negotiations on trade and other issues will take a minimum of two years once the British government invokes Article 50 of the Lisbon Treaty, so we are likely to be entering an extended period of uncertainty. It is also unclear at this juncture as to who will lead the UK’s negotiations with the rest of the EU. A further complication is the issue of Scotland, where leading SNP figures have signalled that Brexit could see demands for another independence poll in the near future.

 

Our base case for the Irish economy had incorporated a Remain win. Following this result, we are likely to downgrade our current GDP growth forecasts (+5.0% in 2016 and +4.0% in 2017), although we will wait until after fully digesting the market reaction to this news and also the release of Q1 national accounts data for Ireland in early July before refreshing our estimates.

 

Philip O’Sullivan

Investec
Telephone: +353-1-4210496
The Harcourt Building, Harcourt Street, Dublin 2, Ireland
Philip.OSullivan@investec.ie
http://www.investec.ie

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