- Under a disorderly exit of the UK from the EU, the Irish economy could be 4¼ per cent smaller than the current projections over the medium-term;
- Employment would increase more slowly and the unemployment rate could rise by 2 percentage points;
- The public finances would deteriorate – the modest surplus projected for 2020 would turn to deficit;
- Updated multi-annual forecasts will be published in the Stability Programme in April.
Minister for Finance and Public Expenditure & Reform, Paschal Donohoe today discussed the economic and fiscal impacts of a disorderly exit of the UK from the European Union with Government. While the central scenario remains an orderly exit – involving the UK leaving with a transition arrangement in place until the end of next year, and some form of trade agreement thereafter – the risk of a disorderly exit has increased in recent weeks.
All forms of UK exit will have a detrimental impact on the Irish economy, with the most adverse impacts likely to be felt in agri-food and indigenous manufacturing sectors, as previous Department of Finance research has shown. The more disorderly the exit, the larger the macroeconomic impact.
In this context, a preliminary assessment prepared by the Department of Finance for Government suggests that a disorderly exit will reduce the level of GDP (the size of the economy) by around 4¼ percentage points (relative to the Budget 2019 central scenario forecast) over the medium term (to 2023) and by around 6 percentage points relative to a hypothetical ‘no Brexit’ scenario. Weaker exports due to trade disruption – tariff and non-tariff barriers – and sterling depreciation, and more modest domestic demand due to higher consumer prices, precautionary saving and uncertainty are the main channels through which economic activity would be affected.
Commenting on the assessment, Minister Donohoe said:
There remains considerable uncertainty surrounding the format the UK’s exit from the EU will take. The assessment by my Department shows that a disorderly exit would be particularly severe. The level of economic activity will be around 4¼ percentage points lower than our existing trajectory over the medium-term. This aggregate figure hides an even larger hit to economic activity in labour-intensive sectors such as agri-food and indigenous small and medium-sized enterprises.
Further, given Ireland’s unique macroeconomic and sectoral exposures to the UK these impacts would be disproportionate relative to the rest of the EU. It is important to recognise that such estimates may not capture the full impact, and the figures may be conservative. Nevertheless, quantifying the impact is important to help Government understand the possible macroeconomic implications and to design the appropriate policy response.
While in aggregate terms the economy is likely to continue expanding, the pace of growth would be lower than is currently expected, with negative spill-overs to the labour market and to the public finances. In terms of the former, the unemployment rate would increase by an estimated 2 percentage points (relative to Budget 2019 projections). In relation to the latter, the headline deficit could deteriorate by nearly a percentage point of GDP in the short-term.
Minister Donohoe said:
In the short-term, the appropriate fiscal strategy would be to allow the public finances absorb the shock – the in-built automatic stabilisers will provide the first line of defence for our economy (allowing a deficit to occur). More information will be available at the time of Budget 2020, which will be introduced in October of this year, and this will enable Government to design the appropriate budgetary policy response.
The future path of the economy and the public finances remains highly uncertain. For instance:
- The timing and nature of the UK’s exit remains unclear;
- Calibrating a model to simulate the impact of an unprecedented shock is challenging;
- The phasing-in of the economic impact is uncertain.
As more information becomes available, the Department will update and publish its assessment in the Stability Programme, which will be submitted to the European Commission in April.