Uncertainty over Brexit already curbing UK growth, says Davy

Stockbrokers note slump in UK consumer and business sentiment at start of year

“In the short term uncertainty surrounding the outcome of the Brexit referendum could persuade UK households and companies to put off spending decisions until after the vote on June 23rd”

“In the short term uncertainty surrounding the outcome of the Brexit referendum could persuade UK households and companies to put off spending decisions until after the vote on June 23rd”

 

Uncertainty over the looming Brexit vote has started to “hurt” growth in the UK economy, presenting a risk of spillovers into the advancing Irish economy, a new report by Davy stockbrokers warns.

The assessment by Davy economist Conall Mac Coille notes a 1 per cent cut to UK gross domestic product has led in the past to a 0.3 per cent fall in Irish GDP.

“In the short term, uncertainty surrounding the outcome of the Brexit referendum could persuade UK households and companies to put off spending decisions until after the vote on June 23rd,” Mr Mac Coille said.

“Indeed, UK consumer and business confidence surveys fell back in January and February, and the depreciation of sterling has shown that investors are more reluctant to hold UK assets.”

Mr Mac Coille said a recent decline in the services purchasing managers’ index, to its weakest level since March 2013, was the “most worrying sign” such uncertainty was already hurting the UK economy.

“In this context, consensus forecasts for UK GDP growth in 2016 have been revised down sharply from 2.5 per cent to just 2 per cent in March.”

On a longer horizon, he said most estimates assumed a “negative” impact on Britain’s economy if the country leaves.

“These estimates suggest that trade barriers could reduce UK GDP by 1-3 per cent in the long run. However, the damage from Brexit doubles or triples to 6-9 per cent of GDP if business investment, productivity growth or competition in the UK economy are hurt by trade barriers.”

Irish exports

The report warns a sharp reduction in sterling could hurt exports from Ireland, although it notes that reliance on the British market has declined to 15 per cent of Irish exports from 50 per cent in the past .

“However, as price-takers, Irish exporters have tended to absorb exchange rate movements into their profit margins in order to maintain output.

“While severe trade disruption would only occur in the worst-case Brexit scenarios, the key risk for Ireland is that productivity and trend UK GDP growth are hurt over the long term by an exit from the EU.”

The report said trade effects would be contained during the exit period, as the Lisbon Treaty allows for a two-year negotiation in which trade agreements are not changed.

“In the event of a Brexit, our view is that an arrangement similar to that with Switzerland is likely, maintaining single market access, albeit with some limited autonomy for the UK on migration. This should limit the impact on Ireland, but it would probably require an extension of the two-year negotiating period. The worst-case scenario is Brexit without a free-trade agreement. UK manufacturing exports to the EU would be subject to an average 4.6 per cent tariff, with retaliatory measures on Irish and EU exports.

“Ireland’s agri-food sector would be very exposed with 50 per cent of exports still going to the UK, potentially facing intensified competition and subject to non-tariff regulatory barriers and costs.”

The Davy report comes as Peter Sutherland, former chief of the World Trade Organisation, warns it would be “in effect impossible” for London to negotiate equivalent access to the EU single market from outside.

“The reality is that losing access to the EU single market would be a big setback for the UK,” Mr Sutherland wrote in the Financial Times.