Hard Brexit ‘could push Ireland and Britain into recession’

Both the Republic and the United Kingdom and could be pushed into recession in the event the UK crashes out of the European Union without a deal, stockbroker Davy warns in a new report.

In its report, Davy points out that the Border between Northern Ireland and the Republic is the “key remaining issue” to a withdrawal agreement between London and the bloc, but suggests “a fudge” will be found to allow the UK to move to a transition period from March and avoid a “cliff-edge” Brexit.

"We believe a disorderly Brexit under World Trade Organisation (WTO) rules is a low-probability/high-impact event that could push both Ireland and the UK into recession," Davy says.

Fears of a no-deal Brexit have been fuelled in recent weeks following the rejection of UK prime minister Theresa May’s Chequers proposals, as well as a potential threat to her leadership from hardline Brexiteers within her party.

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Davy’s “base case” is that the UK will enter the transition period in March 2019, maintaining the status quo, with trade negotiations continuing into the 2020s. This would deliver Irish GDP growth of 4.5 per cent in 2019, it says.

"However, there are obstacles to this scenario playing out: turmoil in British politics, the UK government's reliance on the Democratic Unionist Party, and unrealistic expectations of the UK's economic prospects under WTO rules," Davy says.

“So the possibility of a cliff-edge Brexit, while low, cannot be ruled out,” it continues. In such a scenario, UK GDP would fall by 4 per cent in 2019; 2 per cent in 2020; while Irish GDP growth would slow towards 1 per cent.

“The Northern Ireland backstop is problematic,” it says. “The UK government continues to rely on the political support of the DUP, opposed to any measure that may treat Northern Ireland differently to the UK.

“Pro-Brexit Conservative MPs are unwilling to support any measure that might indefinitely leave the UK as a de-facto member of the EU single market but without any political influence or the ability to conduct its own trade deals.

“The EU is also unwilling to countenance any arrangement that might give the entire UK indefinite access to the EU single market.”

Davy, in its report, outlines four potential paths to “a fudge” on the Border issue. The first of these is an extension of the Article 50 exit period, which it says may be the only option should the British parliament vote down the final withdrawal agreement.

Its second proposal entails dropping the requirement for a legal backstop, something that would be fiercely resisted in Dublin. “Political cover for such a move could be provided by the time-limited transition period, lasting only 21 months,” it says.

Thirdly, it proposes "de-dramatising the backstop", something which EU chief negotiator Michel Barnier has called for. The final "fudge" would involve the UK accepting the backstop to secure the transition period but never implementing it.

Davy puts the probability of “a mild recession” in the UK at 20 per cent. This scenario would occur following a blow to confidence as negotiations “stumble towards” the March 29th deadline without any firm conclusion, before a fudge is ultimately secured.

“Having come so close to such a disruptive outcome and with the clock counting down fast to end-2020, sentiment does not recover,” it warns.