Divergent paths for Irish economy depending on outcome of Brexit process - Central Bank of Ireland Quarterly Bulletin

• The Irish economy continues to grow strongly, supported by strong growth in employment and real incomes.
• The path ahead for the economy in the coming years is linked to the outcome of the ongoing Brexit negotiations. If a disorderly, no-deal Brexit can be avoided, it is projected that underlying economic activity will grow at a relatively solid pace in coming years.
• In a no-deal scenario, however, significant disruption and the negative shock to economic activity would adversely affect output and employment and the path ahead for the next few years would be very different. 

The Central Bank of Ireland has today published its fourth Quarterly Bulletin of 2019. The Bulletin examines recent trends in the domestic economy and provides the Central Bank’s forecasts for the Irish economy and its views on domestic economic policy issues. Given the uncertainty around the path for the economy, this Bulletin outlines forecasts for the main macroeconomic aggregates, prices and labour market variables under both a Brexit deal and no-deal scenario. It is important to emphasise that the degree of uncertainty around these estimates is large, due to the fact that Brexit is an event without historical precedent.

The Bulletin reports:

• In the event of a deal, GDP growth is forecast to be 5 per cent in 2019, 4.3 per cent in 2020 and 3.9 per cent in 2021. A no-deal Brexit from  31 October is forecast to reduce GDP growth to 4.7 per cent in 2019, 0.8 per cent in 2020 and 1.9 per cent in 2021.
• A disorderly Brexit would adversely affect the level of employment in the economy compared to a deal scenario. The reduction in employment growth in the no-deal forecast would imply 73,000 fewer jobs in Ireland by end 2021 compared to a scenario where there is a deal.
• In the event of a deal, the unemployment rate is forecast to move lower, averaging 4.8 per cent in both 2020 and 2021. In the event of a no-deal Brexit, the unemployment rate is forecast to rise to 5.8 per cent in 2020 and 6.9 per cent in 2021.

In the event of a disorderly, no deal Brexit, the key channels through which the economy will be affected will be through shocks to the exchange rate, trade, consumption and investment, leading to a marked deterioration in economic conditions and a much more adverse outlook.

While considerable uncertainty necessarily attaches to estimates from an exercise of this type, a disorderly, no deal Brexit would present enormous challenges and result in a significant loss of output and employment compared to a scenario where there is a deal.

However, Brexit is not the only external risk to the Irish economic outlook. As indicated in the Bulletin, the outlook for global economic activity has continued to worsen in recent months. Given the position of Ireland as a small, highly open economy, the state of global economic conditions has an important bearing on Irish economic performance. Risks in relation to trade and taxation also persist.

Director of Economics and Statistics, Mark Cassidy, said:

“The Irish economy continued to grow at a strong pace in the first half of 2019, despite rising uncertainty about the economic outlook and a less favourable external economic environment. While the underlying outlook for growth in the economy remains positive, there are significant domestic and external risks and uncertainties which threaten that outlook, most notably Brexit.

“This is the first time the Central Bank has published two forecasts for the Irish economy, and this is due to the extraordinary and unprecedented nature of the Brexit process. In the event that a no-deal Brexit were to occur there would be a significant weakening of activity across many parts of the economy. Regions and sectors which are more reliant on trade with the UK and which are more vulnerable to the imposition of tariffs and non-tariff barriers, particularly sectors such as agriculture, food and the broad SME sector, are likely to be more adversely affected.

Our current projection is that in the event of a no-deal Brexit, the economy would expand by 0.8 per cent in 2020, as opposed to 4.3 per cent if a deal can be agreed.  Our forecast is for around 73,000 fewer jobs being created by the end of 2021 compared to a situation where a deal on Brexit can be reached.

“If a disorderly, no deal Brexit can be avoided, it is projected that underlying economic activity will grow at a relatively solid pace in coming years, though with some moderation in growth in prospect. In a no-deal scenario, however, significant disruption and the negative shock to economic activity would adversely affect output and employment and the path ahead for the next few years would be very different.”