Oireachtas Joint and Select Committees

Wednesday, 27 February 2019

Committee on Budgetary Oversight

Macroeconomic Analysis and Fiscal Risks: Central Bank of Ireland

Dr. Mark Cassidy:

We make a point of emphasising the inherent uncertainty relating to the estimates of a disorderly no-deal Brexit. There is no prior example of such a large economy suddenly withdrawing from such a large trading bloc. Our economic models are useful in projecting medium-term and long-term outcomes based on historical relationships. They are less good, however, at predicting short-term outcomes of this sort when one has such uncertain events.

We are projecting a major impact in the first two years after Brexit. We are projecting that economic growth over the two years combined, rather than being above 8%, would be closer to 2%. A decrease of 6% is three quarters of growth taken off the economy in the first two years which is a major impact. I certainly hope that we are not underplaying the extent of the estimate. Our estimates are somewhat more adverse than those projected by the Department of Finance for the first year. Projected growth could be somewhat above or somewhat lower than 1.5%.

This is a shock which would permeate almost all areas of economic activity. We know about the direct impact upon exports, particularly those parts of the economy where a high share of their produce is exported to the UK. There are certain sectors of the economy which are particularly vulnerable both to tariffs and trade frictions, non-tariff barriers, such as delays in moving goods into and out of the country.

There is no doubt that the sector most affected in that regard would be the farming, agricultural and food producing sectors. Around 42% of the exports of the food sector go to the UK. Many parts of that sector, particularly beef, are already encountering problems with viability even before Brexit comes into effect. The food sector is subject to the highest tariffs of any types of products if imposed. For example, tariffs on beef exports could be up to 60%. In addition to overall severe macroeconomic effects, we would highlight there are parts of the economy, not only the food and agriculture sectors, that will be affected.

Overall, the economy now exports only 11.5% of our goods to the UK. In a way this is a very misleading figure because the overall export figure is inflated by such high exports from multinationals. Approximately 42% of the exports of indigenous Irish-owned firms go to the United Kingdom. We also import more from the UK than we export. In addition to food products and consumer products, approximately half of the imports of Irish firms are intermediate products used in the production of other goods and services. Disruptions to supply chains and production processes will be encountered throughout the economy and will particularly hit small and medium enterprises. In our estimates, we tried to take into consideration all of these effects. We believe these are severe overall macroeconomic effects and that we will see particularly severe effects on various parts of the economy.

Over time, after the first one or two years, we believe the overall effects will begin to level off. The reason for this is we see two separate things happening. In parts of the economy, including parts of agriculture, the decline will continue beyond the first couple of years. It will be persistent. On the other hand, we will have such adverse effects in the first one or two years because in many respects the economy is just not prepared. The trading infrastructure of many firms will be taken by the suddenness of this. Over time, the economy, our ports and customs facilities and the ability of small enterprises to fill out the new customs forms will adapt to an extent and begin to recover. Much of the economy will begin to recover and it is hoped new export markets will be found. We will have some positive reaction over time but that is not to downplay the overall seriousness of these effects.

I will come back to Deputy Broughan's other questions but he asked a lot of technical questions at the beginning about scenarios versus forecasts.