Brexit to prompt major cut in Irish growth forecasts, warns ESRI
Think tank says Ireland’s trade position has already beed damaged by uncertainty
Minister for Public Expenditure Paschal Donohoeearlier this week highlighted the potential adverse impact of a Brexit on Government projections for the public finances and growth.
The Economic and Social Research Institute (ESRI) has warned that its growth forecasts for the Irish economy will be downgraded significantly if the UK votes to leave the EU.
The institute said uncertainty ahead of next week’s vote had already damaged Ireland ’s trade position with several headline indicators pointing to a slide in export-related activity.
ESRI economist Kieran McQuinn said if Brexit occurs Ireland’s trading performance will almost certainly “deteriorate further”, necessitating a downward revision in growth forecasts.
“As to the magnitude of it, at this stage it’s very difficult to estimate, but certainly it will result in a lower output expectation,” he told the ESRI’s annual Budget Perspectives seminar.
His comments echo those of Minister for Public Expenditure Paschal Donohoe, who earlier this week highlighted the potential adverse impact of an anti-EU vote on Government projections for the public finances and growth. Speaking on The Irish Times Business Podcast he said: “The fiscal space is a consequence of how your economy is growing and how you manage your national finances, so if there were to be change in the rate of economic growth it would likely have an impact on the fiscal space.”
Companies in the services and manufacturing sectors here have been reporting a gradual slowdown in export-related business since the end of the first quarter of the 2016 linked to uncertainty over Brexit and an associated depreciation in sterling.
The British currency rose on Friday as traders speculated whether the killing of pro-EU MP Jo Cox may alter the balance of opinion in the referendum .
Mr McQuinn said it was difficult to isolate the Brexit component from a general weakness in the global economy, while acknowledging it was central to the worsening outlook.
“In general, when you see such a dramatic revision downwards in the global trade situation it’s only a matter of time before it impacts on the Irish economy given its open nature,” he said.
“While we still expect a strong performance this year and next, definitely there’s a change in the composition of growth from the external position to more domestic sources.”
The ESRI is expected to downgrade its forecast for Irish export growth in its summer economic commentary, which will be published on Tuesday.
However, it is unlikely to make significant changes to its headline growth projections for the Irish economy, which currently predict gross domestic product (GDP) to expand by close to 5 per cent this year.
In his presentation, Mr McQuinn said the ESRI was expecting the budget deficit to fall close to zero next year, meaning the Government may soon need to run a budget surplus to avoid overheating the economy.
He also said it may take until at least 2019 before housing supply meets the level of an demand. The institute suggests the Irish market needs about 25,000 new homes per year but only 17,500 completions are likely this year.
Mr McQuinn said while improving the State’s housing supply would help alleviate some of the tensions in market, it also likely to be matched by a swift drop in unemployment as the construction industry is relatively labour intensive.
This heightens the risk, quite considerably, of the economy overheating, he said.
“If overheating does occur there will be a need to start running counter-cyclical budgets, which will pose a significant policy [for the Government] challenge in itself,” Mr McQuinn said.
A separate study suggesting changes to the minimum wage was not an effective way to tackle poverty was also presented by ESRI economist Tim Callan.
His research suggested hikes to the minimum hourly pay rate did not benefit those most in need because relatively few received the wage. Despite the findings, he said many policymakers still believed the minimum was the most effective tool in combatting poverty.
Another study on the cost of healthcare in the Republic suggested the last government’s policy of moving towards a new system of universal health insurance, which has now been abandoned, could have have increased costs without achieving universality and equitable access.