The governor of the Central Bank of Ireland has sounded a fresh warning on the impact of Brexit on the Irish economy, warning the country’s businesses will have to adapt to a post-Brexit environment.
Speaking to the Cork Chamber of Commerce on Thursday afternoon, Philip Lane said Irish economic activity was continuing to grow at a “significant pace”, but warned that risks to the Bank’s economic forecasts were to the downside given uncertainty over the external environment, with Brexit as a key risk factor.
“Both in the short term and the longer term, the economic impact of Brexit on Ireland is set to be negative,” he said.
Ireland is set to be most exposed to any headwinds from the Brexit vote on account of its close trade links with the UK.
Today’s speech is not the first time the country’s central bank has warned on the impact of the referendum decision. Last month the Bank cut its growth forecasts for 2017 from 3.6 to 3.3 per cent following an initial cut last summer in the wake of the referendum, amid concerns over the impact on the country’s exporters. The UK is Ireland’s largest trading partner.
Mr Lane repeated previous comments that in the absence of any weakening in the UK economy so far, the impact of Brexit in Ireland had mainly been through the depreciation of sterling against the euro.
But the governor warned of the impact in other areas besides Irish exporters, pointing to indirect economic effects through competition from UK imports, supply-chain linkages and increased cross-border shopping.
On a more positive note, he said a weaker sterling could benefit firms relying on imported inputs from the UK and that household income gains due to cheaper UK imports could result in higher domestic spending.
The governor said:
Over the longer term, Irish firms will have to adapt to the post-Brexit environment. The current uncertainty about the future UK-EU relationship will delay many investment plans.
In turn, as clarity about the post-Brexit world improves, firms will have to develop new strategies to respond to the new configuration. In response to higher trade barriers between the UK and the EU, some firms may plan to serve UK customers through FDI into the UK, while others may search for new export markets. In the other direction, some UK firms may look to set up affiliates in Ireland both to serve the Irish market and as a platform for EU-wide trading.
The governor also sounded a warning on increased protectionism in global trade, which he said would be a particular challenge for Irish exporters and the multinational sector.
“Given the importance of the multinational sector to the Irish economy, monitoring and assessing external developments in these areas must be a high priority for domestic policymakers,” he said.