No-deal Brexit would halve economic growth next year, warns ESRI

A no-deal Brexit with the imposition of tariffs will halve economic growth next year, the Economic and Social Research Institute (ESRI) has warned.

In its latest quarterly bulletin, the institute forecasts the Irish economy will grow by a robust 6.3 per cent in 2021 even with the ongoing impact of Covid-19.

However, the forecast assumes the EU and UK reach a free trade agreement before the Brexit transition period ends in December.

If this fails to materialise, growth will be closer to 3 per cent, the ESRI said, primarily as a result of a fall-off in merchandise trade with the UK. The food and drink sector is expected to be the worst hit.

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The negative impact could also be aggravated in the short-term by disruption at ports and airports arising from new customs requirements, the ESRI said.

The warning comes amid continued uncertainty over whether Brussels and London can reach an accord, and with Minister for Foreign Affairs Simon Coveney warning that it was difficult to envisage an agreement on fisheries, a key stumbling block in the talks.

In its report, the ESRI said the Irish economy was facing two significant challenges over the next 12-18 months: the ongoing economic disruption stemming from Covid-19; and the possibility of a disorderly no-deal Brexit.

It highlighted what it described as a major disparity in the impact of Covid-19 on the Irish economy.

Many sectors of the domestic economy have been severely affected with widescale job losses in areas such as accommodation, food, arts and entertainment, it said, noting that unemployment, at 14.7 per cent, remains highly elevated on pre-pandemic levels.

Its report shows that household spending and modified investment declined by 22 and 24 per cent respectively in the second quarter, which were among the worst declines registered in Europe, a reflection of the State's more stringent lockdown.

“On the other hand, exports have held up very well driven by the strong performance of medicinal and pharmaceutical products and computer services,” it said.

While the value of industrial output, which includes pharmaceuticals, rose by 10 per cent in the first half of 2020, construction fell by more than 40 per cent, while arts, entertainment and recreation was down by nearly 75 per cent.

Consumer spending

In light of the stronger-than-anticipated performance of the export sector and a rebound in consumer spending, the ESRI said it now expected the economy here to contract by just 1.8 per cent in gross domestic product (GDP) terms this year.

This represents a significant upgrade on its previous prediction of a 12 per cent decline in 2020.

In terms of the public finances, it said the Government was likely to be looking at an overall budget deficit of €25 billion this year falling to €15 billion next year.

Kieran McQuinn, research professor at the ESRI, said the deficit this year would have been €2 billion bigger only for stronger-than-expected corporation tax receipts.

He also noted that the decline in income taxes has been muted given the soaring rates of unemployment witnessed earlier in the year and that this reflects the concentration of job losses in lower paid employment.

“While the impact of Covid-19 on headline Irish economic indicators is much less than many other European countries, it is clear that the virus has had a devastating impact on many sectors of the domestic economy,” he said.