Theresa May's compromise Brexit plan would still lead to a significant contraction in the Irish economy, costing up to 20,000 jobs over five years, the Central Bank of Ireland has warned.
In its latest quarterly bulletin, the Central Bank assessed the economic implications for Ireland of the UK prime minister’s so-called Chequers plan, which would see the UK remaining in the single market for goods but not services.
It found that while the decline in economic activity would be much less severe than a no-deal Brexit, the proposals would still see output here fall by 1.7 per cent and employment drop by 1 per cent over a five-year period.
The Central Bank has previously calculated that a no-deal or disorderly Brexit could see output here fall by 2.7 per cent, costing up to 40,000 jobs over five years.
In its latest report, the bank also cautioned that its Brexit forecasts did not take into account the possible disruption in financial markets caused by the UK’s exit, including effects on bond and equity markets, which could exacerbate the impact on the State.
While the Chequers plan marks an improvement relative to a no-deal Brexit and a reversion to World Trade Organisation (WTO) rules, it said it still implies a significant curtailment in the UK's market access to the EU.
Mark Cassidy, the Central Bank's director of economics and statistics, nonetheless said the Central Bank was still expecting positive output and employment growth during the post-Brexit period but the latest estimates reflected how much lower they would be compared to a no-Brexit scenario.
In its bulletin, the Central Bank upgraded its headline growth forecasts for the Irish economy, noting “the current phase of strong economic performance” was underpinned by robust and broad-based growth in employment, which in turn was driving incomes and consumer spending.
It projected the economy would grow by 6.7 per cent this year and by 4.8 per cent next year. At the same time, it expects unemployment to fall below 5 per cent in 2019.
Projections for the labour market continue to signal that the economy is moving towards full employment, although some extra capacity is possible through further inward migration and increased participation in the labour market, it said.
This suggests an additional 150,000-plus jobs could be created by 2020, generating a new peak employment level of 2.35 million.
With the economy approaching full employment and the labour market tightening, wage inflation is set to accelerate to 3.3 per cent in 2019 and 3.4 per cent in 2020. But Mr Cassidy said this was not inconsistent with the headline growth rate and rapid bounce-back from the crash.
“We expect more than 150,000 additional jobs to be created in the economy by 2020 and, with consumer price inflation likely to remain subdued, significant gains in terms of real purchasing power can be expected,” he said.
“However, while this is all very welcome, Ireland must learn from past mistakes and be proactive in guarding against boom/bust cycles, by building up buffers to limit the costs of future downturns,” he said.
Mr Cassidy said that, while Budget 2019 was balanced, the Central Bank would have preferred the Government to run a budget surplus to take some of the heat out of the economy and build up fiscal buffers for the future.
“This is all the more important given the clear risks facing the economy. Compared to our European neighbours, we remain particularly vulnerable to potential shifts in the international tax and trade environment,” he said.