Central Bank gives hard Brexit warning
Brexit remains the “main issue” facing the economy, and a disorderly exit of the UK from the bloc would cause a “substantial reduction” in output and employment, the Central Bank has warned.
The regulator, in its second macro financial review published yesterday, laid out its overview of the current state of the economy, with Brexit identified as the major threat.
“The main issue facing the Irish economy is Brexit, and, in particular, the possibility of a disorderly Brexit occurring,” it said.
“A Brexit that preserves current trading arrangements would still see uncertainty arising owing to the EU-UK negotiations that would remain to be completed after March 2019.
“A hard Brexit would cause a substantial reduction in output and employment. Recent years have seen sharp movements in the euro-sterling exchange rate. Any further weakening of sterling would make Irish exports to the UK more expensive. In the event of a hard Brexit, a weaker pound could coincide with an increase on tariffs on those exports.
“Sectors such as agri-food and wholesale-and-retail are more exposed to the effects of Brexit than others, while regions with a focus on the UK market, such as the Border counties, are more vulnerable.
“Brexit could also disrupt the activities of firms reliant on imports from the UK.” Furthermore, the regulator warned that a hard Brexit could lead to reduced profitability for Irish banks.
“Irish retail banks’ aggregate balance sheet increased marginally in the last 12 months,” it said.
“Loans books are heavily concentrated in lending to Ireland and the UK, and mainly involve property loans.
“Any adverse economic conditions arising from Brexit could reduce bank profitability, and have a material impact on the credit quality of Irish retail banks’ loan portfolios. In the event of a hard Brexit, the ability of Irish retail banks to issue debt through the UK could be affected, and they may face operational and logistical challenges issuing debt in alternative markets.”
In the insurance sector “most firms” are likely to be affected by financial market volatility.
The regulator identified other risks including volatility in financial markets and residential property price growth.
Central Bank deputy governors Sharon Donnery and Ed Sibley said the regulator has been taking steps to bring a “resilience” to the economy, but that Brexit was already being felt.
“In terms of the depreciation of sterling, the economy is already feeling the effects of Brexit,” said Ms Donnery.
Sharon Donnery: economy feeling effects of Brexit