Deal or no (Brexit) deal: Irish economy faces challenges

The Irish economy will face challenges regardless of how the UK exits the European Union, rating agency DBRS said on Monday, warning that while a no-deal exit will be painful, a benign Brexit risks a return to "boom-bust" dynamics.

In a new report, the ratings agency said that a no-deal Brexit "is clearly the most painful outcome for the Irish economy", noting that it could result in the Irish economy being 4-8.2 per cent smaller over the long-term, compared to a no-Brexit baseline. This is based on estimates from sources such as the Department of Finance, who assess the potential reduction of the economy to be in the range of 2-4 per cent over the longer-term, while the Bank of England has suggested that a disorderly exit could hurt the Irish economy by as much as 8.2 per cent.

However, DBRS did warn that the alternative, whereby the UK remains part of the customs union or the EU single market, won’t be a perfect outcome either.

“A benign Brexit outcome in which uncertainty associated with Brexit evaporated would not eliminate, and over time may even exacerbate, existing economic challenges,” it said.

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The ratings agency says that the threat of a no-deal Brexit may be starting to apply some “convenient friction” to the Irish economy. But if a deal is agreed before March 29th, and the UK’s departure is an agreeable one, then concerns of economic overheating, caused by supply constraints in labour and real estate markets, could be “exacerbated”.

If we see a benign, or even a no-Brexit, outcome, this will increase domestic confidence and demand in Ireland, tighten labour supply, and improve the unemployment rate, DBRS said.

“The risk is that these conditions could lead to a rapid increase in price and wage growth that reignites the boom-bust dynamic that has previously beset the Irish economy.”

Responding to Brexit

The agency says that how Ireland manages Brexit, whatever shape it might take, will be important for assessing Irish credit fundamentals.

If the economy can demonstrate clear evidence of “enhanced resiliency” to external developments such as Brexit, then the agency could see upward rating pressure could be warranted. The agency recently affirmed Ireland’s sovereign rating at A (high) with a stable trend. If we see a return of economic imbalances, comparable to historical episodes, this “ would weigh on Ireland’s credit quality”.

Meanwhile, Moody’s took no action with its rating of Irish debt on Friday. While February 8th had been indicated as a day of potential rating action for the Irish sovereign, the rating agency said it opted to make no decisions and will reconsider its Irish ratings on August 2nd. Ireland is currently rated A2 (stable) by Moody’s, and was last upgraded in September 2017.