For the Irish economy and businesses, the imminent threat of a no-deal Brexit has been taken off the table. The UK will not crash out without a deal on Friday evening, or some time over the next few weeks. But much uncertainty remains and by October another cliff-edge risk could come into view as the new Halloween deadline approaches. So Brexit and its potential fall-out will remain a vital factor for the economy and Irish businesses for 2019. Irish businesses face yet another deadline and the Government has to plan its finances without knowing how Brexit will pan out. The uncertainty just rolls on . . . and on. Here are the key issues.
1. No-deal risk
A no-deal Brexit would bring a significant and uncertain economic threat as the UK would rupture its trading links with the EU overnight. This isn’t going to happen now in the near future, but could quickly re-emerge as an Autumn risk.
By its nature, forecasting what exactly this would mean for the economy is difficult – but it would be a substantial hit. The Economic and Social Research Institute in its latest outlook said that 2019 growth would be 3.8 per cent this year and 3.2 per cent next year, but that in the event of a disorderly no-deal happening in early 2019, this would fall to growth of 1.2 per cent this year and 2.4 per cent next year. The Central Bank estimates that the hit to the economy in the first year after a no-deal would be even greater, around 4 per cent of GDP. What has happened now is that this risk to growth has been pushed forward into late 2019 and 2020.
It is possible – if unlikely – that Theresa May will get her deal through the House of Commons before May 22nd – thus avoiding the need to elect MEPs. Or the deal could be passed at a later date before the October deadline, with the UK having held European elections.If the withdrawal agreement is passed, the formal decision made by the EU leaders says that the UK then leaves on the first day of the following month.
The UK leaving under the withdrawal agreement would be an ideal outcome for the Republic as this would mean that the UK would then enter the standstill transition period. Trading arrangements would remain as they are until at least the end of 2020 and possibly the end of 2022 and the two sides would try to negotiate a trade deal in the interim.
A review has been built into the extension arrangement for the June European council meeting , but all sides say that this is no more than looking at how things are going and will not turn into another “cliff-edge”. The only explicit obligation is the reqirement of the EU to elect MEPs, if it stays beyond the election. Were it somehow to renege on this then it is out on June 1st.
Of course we could get to October with no decision, with a further extension granted. Or the UK could hold a second referendum, and this could lead to a reversal of the Brexit decision. All options remain on the table.
It is difficult to judge the impact of this uncertainty on our overall level of economic growth, which has remained reasonably strong on the basis of up-to-date figures such as tax returns and unemployment data, despite some wobbles in confidence indicators which are probably Brexit-related, in part at least. But it is likely to be having some ongoing impact.
And now the Government enters another budget cycle against a backdrop of uncertainty. Barring a surprise early passing of the withdrawal agreement, the Minister for Finance Paschal Donohoe will have to prepare his 2020 forecasts with an eye to a remaining no-deal threat, which could even still be in the air as next year's budget is presented in early October.
2. The price of uncertainty
For Irish businesses, an imminent risk of a no-deal crash has gone, but the spectre of Brexit continues to hang around. Ibec, the business group. welcomed the extension but added that “while the October deadline aims to keep the pressure on the UK, business is also left to manage the rolling, costly uncertainty. A longer extension would have been preferable.” Ibec chief executive Danny McCoy said that”it has been a frustrating and incredibly costly period for business, and there is still no clarity.”
"Businesses will breathe a sigh of relief that an imminent no-deal is avoided," said David McGee, Brexit lead at PwC Ireland, but he added that the uncertainty rolls on and it is now difficult to see what the political way forward will be. Many clients had spent significant sums of money preparing, he said, including building up stock levels. His advice for business is to continue Brexit preparations and keep the no-deal risk very much in mind. Many financial services firms had already pressed the button on moving part of their business to Dublin, McGee said, and would likely continue to do so, with a bit more time now given for them to complete transfers and get authorisation.
Business reaction to a further extension is muted, according to David Carson, Brexit lead at Deloitte.
“On the plus side it removes an immediate unknown and has removed the prospect of an imminent no deal scenario. But those that have extensively prepared for two different dates already are frustrated to now have a third date to work towards.”
The threat of a no-deal Brexit has hit confidence indicators and led to significant expense for businesses – and this is now set to continue.
“Prolonged uncertainty may continue to delay investment decisions that companies here in Ireland may be considering, and companies now face a further period of limbo,” said Carson.
It is better for the economy and business than dealing with no-deal chaos – a lot better in most cases – but it is still far from ideal. Parts of the domestic economy, notably the food sector and particularly the beef industry, are very vulnerable to a no-deal exit and will hope that this risk can gradually recede in the months ahead.
3. Sterling swings
A key risk factor for Ireland in Brexit is the value of sterling and the potential impact of a fall on our exporters. The UK currency is trading at just over 86p to the euro on Wednesday, little changed on earlier this week. Before the EU summit, it had appeared that some kind of extension was more or less priced in to the currency. So a bust-up in Brussels and no extension, or some last-minute drama in the run-up to the previous Brexit date on Friday, could have led to a very large sell-off. The Central Bank had warned that sterling could fall close to parity with the euro in the event of a no-deal crash-out.
The maths of this for Irish business is clear enough. Sterling has fallen from levels of below 80p to the euro before the 2016 Brexit vote, which had been very favourable to exporters. However a number of surveys have shown that Irish businesses can manage well enough in the mid-80s range . A minority start to feel the pinch in the high 80s and once sterling heads into the 90p-plus range, it causes significant competitiveness pressures.
Like the rest of us, investors and traders will be trying to work out where last night’s decision will lead. But as it has over the last year or so, the currency will be hit if and when no-deal speculation rises. If there is a move towards a softer Brexit, however, and the threat to the UK economy is removed, it could move significantly forward. The decision in the early hours of Thursday morning was not clear enough to let this happen for now.
4. Crystal ball gazing
The long-term future of the UK/EU relationship remains unclear, largely due to the ongoing uncertainty in UK politics in defining what it wants, within the realm of what is possible. The Republic will hope that the latest extension and the political moves in the UK will be the start of the move to an organised, softer version of Brexit, with the withdrawal agreement eventually passed, followed by talks on a future close relationship. This would remove a lot of the economic threat for us.
“Close EU-UK alignment into the future is in our clear and collective economic interests and is a vital means to protect the peace process and the all-island economy,” said Ibec’s McCoy, “ Hopefully, the UK position will evolve on this basis.”
Granting the UK more time could indeed open the way to a softer Brexit, or even a second referendum. But given the state of UK politics, it is way too early to call it yet.