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

2. 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

3. UK economy in good shape

4. 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

6. 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 $ 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 (€ range ?)

7. Long, difficult Brexit process is only starting
Negotiation Process
UK government wants to trigger Article 50 by end March 2017, so likely to be H 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

8. 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

9. 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

10. 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

11. 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 % in 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

12. …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

13. 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 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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