Brexit Set To Whack Irish Economy

14 Feb 2018 | 09.53 am

Brexit Set To Whack Irish Economy

Gloomy prediction from Copenhagen Economics

14 Feb 2018 | 09.53 am

An independent study from Copenhagen Economics commissioned by the Department of Business has concluded that Brexit will have negative impacts on the Irish economy in all scenarios analysed.

The study examines the implications and quantifies the impact of possible new barriers to trade which might emerge as a result of Brexit. It considers a range of possible Brexit scenarios – an EEA-type scenario, a customs union-type scenario, and FTA scenario and a worst case, WTO scenario.

The study identifies the best and worst case scenarios where the impact could be minimised. An EEA scenario would be least damaging gradually reducing GDP growth by 2.8% by 2030. A WTO scenario would have the most impact gradually reducing GDP growth by 7% by 2030.

Five sectors account for 90% of the impact – Agri-food, Pharma-chemicals, Electrical Machinery, Wholesale & Retail, and Air Transport. The rise of non-tariff barriers – specifically due to regulatory divergence – is the main factor driving the results.

Worst Case Scenarios

The study identifies the best and worst case scenarios where the impact could be minimised. An EEA scenario would be least damaging gradually reducing GDP growth by 2.8% by 2030. A WTO scenario would have the most impact gradually reducing GDP growth by 7% by 2030.

Five sectors account for 90% of the impact – Agri-food, Pharma-chemicals, Electrical Machinery, Wholesale & Retail, and Air Transport. The rise of non-tariff barriers – specifically due to regulatory divergence – is the main factor driving the results.

The consultants predict that Brexit will have negative impacts on the Irish economy in all scenarios analysed. Brexit will have negative impacts on Irish trade with adverse knock-on effects on Irish production and ultimately Irish GDP.

Download Ireland and the Impacts of Brexit 

Based on its modelling, CE is forecasting that Irish GDP will be 2.8 per cent lower than the non-Brexit baseline level in 2030 in the EEA scenario and 4.3 per cent lower than this baseline in the customs union scenario or FTA scenario. Under the WTO scenario, GDP would 7.0 per cent lower than the non-Brexit baseline level of GDP in 2030 if UK regulation diverges to the full extent of non-FTA partners.

Irish exports and imports of goods and services are predicted to be negatively affected by Brexit in all scenarios analysed in this report. In the EEA scenario, the consultants predict Ireland’s total exports of goods and services to be 3.3 per cent below the non-Brexit baseline level in 2030 – this figure varies depending on the degree of regulatory divergence that occurs.

The impact on total Irish exports could be up to -4.4 per cent in the customs union scenario and -4.5 in the FTA scenario. In the WTO scenario, total Irish exports are predicted to be 7.7 per cent below the non-Brexit baseline level in 2030.

In percentage terms, Irish imports will be slightly more affected than exports in all scenarios due to a higher exposure towards the UK in relation to the imports of goods.

Wages Impact

Copenhagen Economics predicts that Brexit will impact Irish wages negatively for all skill groups. In the WTO scenario, its results show that real wages will be 8.7 per cent below the 2030 non-Brexit baseline level for low skilled workers, while the equivalent negative effect for high skilled workers will be 6.5 per cent. In the EEA scenario, impacts will be smaller and range between 2.6 per cent for high skilled workers and 3.5 for low skilled workers.

The CE opinion is that the impact of Brexit is particularly large in some sectors as a result of a combination of a large scale of Irish-UK trade and the scale of the Brexit impact in the specific sector. The consultants find find that five sectors account for the vast majority of the total impact of Brexit and are therefore of key strategic interest to Ireland in the Brexit negotiations:

• Agri-food, where processed foods, beef, sheep and other cattle meat and dairy are the sub-sectors in which the largest impacts occur and where trade and production are predicted to fall significantly below the non-Brexit baseline level in 2030. Production in other primary agriculture sub-sectors such as grains, fruit and vegetables, forestry and fishing etc. will also be negatively affected – however, to a smaller extent. Impacts in the agri-food sector are driven by a combination of tariffs, customs costs and the risk of regulatory divergence.

• Pharma-Chemicals, which is the absolute largest export sector in Ireland. CE’s analysis shows that production in the sector could fall by 1-5 per cent below the non-Brexit baseline production level in 2030. Impacts in this sector are almost exclusively driven by the risk of regulatory divergence and increased border costs.

• Electric machinery, which includes different types of electronic equipment such as computers, televisions and communication equipment, and is another large export sector. Production in this sector is predicted to fall by 5-10 per cent below the non-Brexit baseline production level in 2030. Customs costs and the risk of regulatory divergence are the main factors driving the impacts in this sector.

• Wholesale and retail could face new costs in their supply chains and as a result of diverging regulatory requirements. The sector will also be negatively affected by an overall drop in consumer demand resulting from Brexit.

• Air transport, which could face substantial challenges on routes to the UK as a result of Brexit.

Of the scenarios analysed in this report, the EEA-scenario is the outcome that would minimize the economic loss (in GDP) for Ireland in the EU-UK trade negotiations. Measured relative to Irish GDP in 2015, the difference between the “best” (EEA) scenario and the “worst” (WTO) is €11 billion per year in 2015-level.

According to CE: “In a hypothetical situation, where regulatory divergence for goods and services could be avoided and hence the Brexit impacts only related to tariffs and border costs, the theoretical loss to Irish GDP would be further reduced to around 1 per cent of GDP or approximately €3 billion in 2015 terms.

“With the objective of minimizing the overall economic loss to Irish GDP, the best possible trade negotiation outcome for Ireland would be an agreement that has an acceptable balance of rights and obligations for all parties and with the following main elements:
• No tariffs

• Large quotas for agricultural products

• Low border costs

• Landbridge transit

• Low regulatory divergence

• Low barriers for service trade.”

Domestic Policy Options

Based on findings described in the report and extensive engagement with Irish stakeholders, including many business organisations, Copenhagen Economics have suggested domestic policy responses to mitigate the impacts of Brexit. These fall into three broad categories:

• Trade promotion policies (e.g. helping existing exporters to access new markets, or new exporters to engage in exporting)

• Enterprise policies (e.g. helping the transition from declining to growing sectors)

• Skills policies (e.g. supporting skills required by the unavoidable adjustments)

CE conclude that Ireland is uniquely exposed to Brexit due to a very high trade intensity with the UK. Approximately 15 per cent of Irish goods and services exports are destined to the UK. In certain sectors, the UK is an especially important market, such as e.g. the agri-food sector where around 40 per cent of exports are destined for the UK. In addition, two-thirds of Irish exporters make use of the UK landbridge to access continental markets.

Business minister Heather Humphreys (pictured) commented: “Without a doubt, the study underlines the importance of a satisfactory transition period and exit deal. The government is utterly determined to get the best possible deal for the Irish people, negotiating as part of the EU 27, and in full support of chief negotiator, Michel Barnier.

“The study does not predict a contraction in our economy but rather a lower growth rate than would be otherwise expected over the long term,” the minister added.

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