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No-deal Brexit an 'enormous challenge' for Irish economy - central bank

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No-deal Brexit an 'enormous challenge' for Irish economy - central bank
FILE PHOTO: Offices in the Central Bank of Ireland are seen in the financial district in Dublin, Ireland November 8, 2017. REUTERS/Clodagh Kilcoyne/File Photo   -   Copyright  Clodagh Kilcoyne(Reuters)
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DUBLIN (Reuters) – A no-deal Brexit would present “enormous challenges” to the Irish economy and cut growth to just 0.8% next year, Ireland’s Central Bank said in its most detailed set of projections to date on the potential risks.

Ireland’s fast-growing economy is considered the most vulnerable to Brexit among remaining European Union members because of its close trade links and shared land border with the United Kingdom.

The forecast for next year should Britain leave the bloc on Oct. 31 without any kind of transition period was similar to the official government forecast for 0.7% gross domestic product growth, which Finance Minister Paschal Donohoe used as his base case when presenting a “no-deal” budget for 2020.

The central bank was less optimistic beyond that, however, predicting that in a no-deal scenario, growth would rebound to 1.9% in 2021 compared with the government forecast of 2.5% and that unemployment would climb to 6.9% in two years time versus the 5.9% pencilled in by Donohoe’s department.

“While considerable uncertainty necessarily attaches to estimates from an exercise of this type, a no-deal Brexit would present enormous challenges and result in a significant loss of output and employment compared to a no-Brexit scenario,” the central bank said in its quarterly update to projections.

The bank said it was the first time it had published two such detailed forecasts for the Irish economy, predicting that if a no-deal is avoided, the economy would expand by 4.3% next year and 3.9% in 2021.

It expects growth at or just below 5% this year regardless, with adverse no-deal effects on consumption, investment, exports and imports all set to materialise in 2020 when all four categories would contract.

The bank is comfortable with government plans to let the state’s finances return to deficit in a disorderly Brexit, Director of Economics Mark Cassidy told a news conference, saying it made sense to allow the economy to absorb the shock while supporting hard-hit businesses.

The central bank cautioned though that it was important to emphasise how large the degree of uncertainty was around the estimates, given Brexit is an event without historical precedent.

“There is substantial uncertainty around how the economy would adjust: by how much and how quickly would trade flows be affected by the imposition of WTO tariffs, what would be the scale of logistical and supply-chain disruption, how would financial markets and exchange rates react,” it said.

(Reporting by Padraic Halpin; Editing by Andrew Heavens)

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