Brexit: a major challenge, full of uncertainty December 2016 John Fahey Senior Economist AIB

UK Activity holds up well post Brexit vote Widespread view that uncertainty caused by Brexit vote would see a marked slowdown in UK GDP likely to be around 2.5% lower by end 2018 per both BoE and NIESR estimates However, no sign yet of a marked weakening in activity Retail sales, labour market, PMIs all hold up. GDP rose by 0.5% in Q3. Economy may be in a Brexit “sweet spot” where it is benefiting from some positive effects but the negative consequences yet to come through Currency depreciation and monetary easing support activity in 2016

UK economy in good shape

Economy still likely to slow in 2017/18 Slowdown in economy still looks likely in 2017/18 Uncertainty expected to curtail investment in particular Rising inflation to hit real incomes and depress consumer spending Clear signs already of sharp rise in output prices which will feed into consumer prices Early signs also of a softening in the property market, with mortgage approvals at 18-month low Employment growth has slowed since the vote for Brexit Historical experience in UK is that benefit of weak sterling eroded over time, does not resolve BoP deficit

Sterling takes a big hit on Brexit fears Sterling weakened in lead up to the referendum and then fell sharply on the result Expectations of a ‘hard’ Brexit saw further sharp falls by sterling in the autumn EUR/GBP hits 2010/11 level of 90p, up from 70p a year ago...(GBP fell €1.43 to €1.10 vs. Eur) GBP/USD down below $1.25 - 30 year lows Trumps win and rising political risks in Eurozone see sterling short positions cut. Euro falls back to 85p Risks remain for sterling, though, as exit talks with EU next year are likely to prove difficult Sterling could come under pressure again - euro may rise back up to 90p on renewed hard Brexit fears Political risks in Europe, though, may help limit the downside for UK currency vs. Euro (€1.10-1.20 range ?)

Long, difficult Brexit process is only starting Negotiation Process UK government wants to trigger Article 50 by end March 2017, so likely to be H1 2019 when UK exits EU Indications from EU that talks on new trade deal can only begin after UK leaves Thus exit deal likely to contain only transition arrangements on trade. Migration vs Single Market UK Government putting emphasis on regaining control over immigration and return of full sovereignty so could lose access to Single Market – hard Brexit EU strong on point that access to Single Market requires freedom of movement Considerable Uncertainty EU leaders will want to preserve EU and not create a precedent of an easy Brexit that other countries could be tempted to follow Period of uncertainty could extend well into next decade if real trade talks on commence after UK departs EU Britain seems in denial about economic risks posed by Brexit UK has no veto on exit deal. EU leaders will decide the terms UK Parliament could block an exit deal eg on lack of access to Single Market

Key issues in future trade arrangements UK Dependence on EU FDI / City of London Trade Deal Options Very close links between UK & rest of EU, which takes 45% of UK exports UK biggest recipient of FDI in EU. London centre of European financial services UK puts sovereignty ahead of retaining access to single market – thus Norway and Swiss type trade deals ruled out by Prime Minister Risk of Hard Brexit Free Trade Agreement Hard Brexit would see UK leaving the EU Customs Union and Single Market, while current EU trade deals with other countries would no longer include UK UK likely to seek its own FTA with EU, but like Canada, it will take years to negotiate, may still not include services, still abide by EU rules

WTO Tariffs likely in Hard Brexit Membership of WTO UK would need to negotiate full membership of WTO and begin international trade talks with many countries, including EU WTO Rules No Trade Agreement / access to Single Market UK would have to fall back on WTO rules which require a common set of tariff rates to be applied to all countries where no free trade deals exists Tariffs Applying tariffs raises prices, but low/no tariffs weakens position in many trade talks EU applies significant common external tariffs which would be levied on UK exports in absence of trade deal

Brexit is a major headache for Ireland Brexit has serious implications given close economic/trade links with UK Trade with UK equates to 35% of Irish GDP. Thus, it is a key trading partner UK takes 43% of Irish indigenous firm exports, so very important trading partner Expected negative impact of Brexit on UK economy will have knock-on effect in Ireland Agri, tourism, energy, retailing, financial sector most likely to be impacted by Brexit Sterling has fallen sharply on Brexit concerns, which will hit exports to UK Also impacts Irish firms competing with UK exports to Ireland and third country markets Cross border trade likely to pick up as shoppers head North following sterling's big fall, while there will be a significant impact on cross-border businesses like hotels, restaurants Higher trading costs from more administration, differing trade rules and regulations, compliance costs, possible customs duties and tariffs when UK leaves EU Brexit could impact considerable cross-country investment between UK and Ireland. Border with Northern Ireland would become an external EU land border Ireland will lose key ally within EU when UK leaves as share similar views on taxation, regulation, state involvement in economy etc. Trade with UK equates to 35% of Irish GDP. Thus, it is a key trading partner UK takes 43% of Irish indigenous firm exports, so very important trading partner Expected negative impact of Brexit on UK economy will have knock-on effect in Ireland Sterling has fallen sharply on Brexit concerns, which will hit exports to UK

Brexit to curtail growth of Irish economy Recovery by Irish economy to continue but Brexit will hamper pace of activity Sharp fall in sterling also a major negative for trade UK economy expected to weaken on Brexit which would also impact Ireland Irish GDP growth to slow to 3.0-3.5% in 2016-19 period ESRI-D/Finance estimates Irish output would be almost 4.0 % lower over time if there is a hard Brexit, with employment 2% lower and unemployment nearly 2% higher

…and is also a major headache for Northern Ireland Could stifle the NI economy, become more isolated from Europe Lose access to EU structural funds Will limit benefits of reduction in Corporation Tax Rate if lack of full access to EU Markets and will become less attractive to FDI Severe blow for NI Agri-industry, as it would be excluded from CAP and could lose full access to EU markets EU is a key market for much of manufacturing industry in NI and so it would be badly impacted by any disruption to trade Negative impact on economy in Great Britain Would impact NI economy too as the two economies move in tandem and Britain key market for NI firms Slowing UK economy and pressure on public finances could impact level of funding to NI from UK Exchequer Northern Ireland would be the only external land border between EU and UK Loosening of economic ties between the Republic and North – €3bn in cross-border merchandise trade in 2015 Cross-border tourism, energy, trade and investment could all be impacted by Brexit Although, weaker sterling boost to cross border shopping in NI Brexit will also likely prolong low interest rate environment

Summary UK Government giving priority to immigration, independence and sovereignty EU giving priority to preserving rules surrounding Single Market No UK veto on Brexit deal which weakens its negotiating hand considerably Clear risk of a hard Brexit that would see UK lose access to Single Market UK may have to fall back on WTO rules which would require a common set of tariffs Foreign investment, financial services, trade would be badly hit by a hard Brexit UK Parliament may move to block an unfavourable Brexit deal Real trade talks only likely to commence post-Brexit and will be long drawn out UK economy to weaken on rising inflation, falling investment and uncertainty Downside risks persist for sterling but watch political developments in Eurozone Note: All Irish data in tables are sourced from the CSO unless otherwise stated. Non-Irish data are from the IMF, OECD and Thomson Financial. Irish forecasts are from AIB Economic Research Unit. This presentation is for information purposes and is not an invitation to deal. The information is believed to be reliable but is not guaranteed. Any expressions of opinions are subject to change without notice. This presentation is not to be reproduced in whole or in part without prior permission. In the Republic of Ireland it is distributed by Allied Irish Banks, p.l.c. In the UK it is distributed by Allied Irish Banks, plc and Allied Irish Banks (GB). In Northern Ireland it is distributed by First Trust Bank. In the United States of America it is distributed by Allied Irish Banks, plc. Allied Irish Banks, p.l.c. is regulated by the Central Bank of Ireland. Allied Irish Bank (GB) and First Trust Bank are trade marks used under licence by AIB Group (UK) p.l.c. (a wholly owned subsidiary of Allied Irish Banks, p.l.c.), incorporated in Northern Ireland. Registered Office 92 Ann Street, Belfast BT1 3HH. Registered Number NI 018800. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. In the United States of America, Allied Irish Banks, p.l.c., New York Branch, is a branch licensed by the New York State Department of Financial Services. Deposits and other investment products are not FDIC insured, they are not guaranteed by any bank and they may lose value. Please note that telephone calls may be recorded in line with market practice.

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