RBK & AIB Backing the Midlands Corporate Sector
Welcome & Introduction
Gerard CorcoranHead of AIB Meath, Westmeath & Longford | Retail & Business Banking
T: (046) 903 7850 E: [email protected]
Dermot RyanHead of Business Banking, Meath, Westmeath & Longford
T: (086) 772 5128 E: [email protected]
The Challenge of Brexit for Ireland
November 2017
John FaheySenior EconomistAIB
2
BREXIT
Sterling
Customs & Tariffs
Transition Arrangement
Future of the EU
Trade Deal
Migration
Northern Ireland/ Scotland
City of London
Does the UK know what it wants ?
Financial Times 16th Dec 2016
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 has serious implications for Ireland given close trade links with UK
• Trade with UK equates to 35% of Irish GDP/GNI. Thus, it is a key trading partner
• UK takes some 40% of Irish indigenous firms exports, so very important market
• Common labour market with UK – Common Travel Area pre-dates EU membership
• Expected negative impact of Brexit on UK economy will have knock-on effect on Irish exports to UK
• Common land border with the UK – Northern Ireland
• A lot of cross country investment between Ireland and the UK, especially in retailing, agri-food, banking, insurance, energy
Brexit is a major challenge for Ireland
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
• Higher trading costs from more administration, differing rules and regulations, compliance costs, possible customs duties/tariffs when UK leaves EU
• Brexit could impact the considerable cross-country investment between UK and Ireland
• Border with Northern Ireland will become an external EU land border, with possible Customs checks and other restrictions on free movement of goods
• Ireland will lose key ally within EU when UK leaves as share similar views on taxation, regulation, state involvement in economy etc.
• Brexit will see an outflow of investment and jobs from the UK to EU countries, including Ireland, especially in financial services
• Brexit will provide Ireland with a big advantage over UK in competing for global FDI coming into Europe that needs full, unfettered access to EU markets
Brexit brings risks and opportunities
Brexit expected to lower growth rate of Irish economy
ESRI estimate that Irish output would be reduced by 2-2.5% on a soft Brexit
Sharp fall-off in trade with UK likely on a hard Brexit
Output almost 4.0 % lower over time if there is hard Brexit and a fall back on WTO rules
Employment 2% lower and unemployment rate nearly 2% higher in hard Brexit
Impact of Brexit on Output (% deviation from base)
No Trade Agreement / access to Single Market
Membership of WTO
UK would need to negotiate full membership of WTO and begin
international trade talks with many countries, including EU
WTO Rules
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 and thus Customs checks and duties
Tariffs
Applying tariffs raises prices, but low/no tariffs weakens position in
any trade talks
EU applies significant common external tariffs which would be levied
as Customs duties on UK exports to EU in absence of trade deal
WTO Tariffs/Customs controls likely in Hard Brexit
Tariffs and non-tariff barriers both problematic for trade
• Rules of Origin for Goods
• Standards of Production (inspections)
• Transport Licenses
• Delays, Physical inspections
• Increased Admin Costs
Non-Tariff Barriers
Agri-sector would be severely impacted by hard Brexit
Main EU tariffs relate to food products, keeping prices up. UK may not maintain these post-Brexit
Food and Beverages account for 25% of total Irish exports to UK
Around 40% of Irish food exports go to the UK
Other sectors very dependent on UK market include machinery and transport, metal products, textiles
Some 40% of indigenous Irish exports go to UK compared to 10% for foreign owned companies
0%
%5
%10
%15
%20
%25
%30
35%
40%
%45
50%
Share of Exports by Industry Destined for the UK (ESRI)
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 should be positive for Dublin region because of increased FDI from UK
• Should be increased inflow of investment/jobs in financial services in particular
• Underpin the housing and CRE markets in Dublin and its hinterland
• Negative for border counties and rural economies dependent on agri/tourism, especially if customs controls and tariffs introduced
• Tourism already seeing a fall-off in UK numbers owing to weak sterling
• Could be a sharp drop in market prices in UK if existing tariffs removed on food imports. Irish beef and cheese sectors particularly vulnerable as key export market
• Longer term, there could be increased FDI into Ireland if UK loses free access to EU markets – Financial services, IT, Pharma, healthcare sectors most likely to benefit
Impact will be regional\sectoral with winners\losers
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
• Sterling has fallen sharply on Brexit concerns, which hits exports to UK
• Also impacts Irish firms competing with UK exports to Ireland and elsewhere
• Many Irish exporters to UK are small firms with no Treasury function so don’t hedge currency exposure
• Cross border trade picks up as shoppers head North following sterling's big fall.
• Big rise in on-line sales going to the UK
• Sterling weakness has already seen a big fall-off in tourist numbers from the UK this year
• Irish firms, though, have become used of sterling trading in weak and volatile fashion in past decade
• EUR/GBP has entered a 87-92p trading band in past six months
Sharp fall of sterling adds to Brexit concerns
0.68
0.72
0.76
0.80
0.84
0.88
0.92
0.96
Nov-15 May-16 Nov-16 May-17 Nov-17
Source: Thomson Datastream
Euro / Sterling Exchange Rate£
FX Market Outlook
0.60
0.70
0.80
0.90
1.00
Nov-03 Nov-05 Nov-07 Nov-09 Nov-11 Nov-13 Nov-15 Nov-17
Euro / Sterling Exchange Rate
Source: Thomson Datastream
£
Progress of Brexit negotiations key factor influencing sterling in period ahead.
If ‘soft’ brexit looks on the cards, EUR/GBP could move down to 85p or below
if ‘hard’ Brexit more likely, EUR/GBP could move above 93-95p level to trade in a 95-100p band
Future Relationship(January – June 2018)
Some key issues
• Scope of discussions on future
relations – trade, security etc
• Sketch aims for post-Brexit FTA
• Different to normal trade deal
as no trade barriers at present
• Level playing field- prevent
“Regulatory Dumping” e.g.
workers rights, subsidy rules
• Extent of market access to be
maintained
• Disputes resolution mechanism
The Withdrawal Terms(June-December 2017)
Some key issues
• Disentangling past
ties/commitments
• Budget discussions on the
Exit Bill the UK faces
• Citizen Rights -4m EU/UK
migrants, preserving their
rights, how to enforce it
• Ireland/NI, type of border,
Irish citizens in NI, provision
to allow NI re-join EU if
United Ireland
Transition Arrangements(July-November 2018)
Some key issues
• Role of European Court of
Justice in this period
• Benefitting from market access
requires adhering to EU Rules
• Customs arrangements
• Free movement of labour and
immigration controls
• Cost to UK for access to EU
markets/use of EU agencies
• Likely period of time transition
arrangement will last
Exit Negotiations Timeline?
Future customs arrangements the key issue
UK to leave EU, Single Market and Customs Union – end of common external tariffs
Exit deal will need to contain transition arrangements to avoid disruption to trade until
an EU/UK trade deal is done
UK suggests a common UK-EU Customs Union during transition period
UK wants to conclude full free trade deal with EU within 2 years of its 2019 departure
The more UK wants to regain autonomy/sovereignty and do third country trade deals,
the less favourable that its access to EU markets will be in future
Worst outcome is no deal and UK has to fall back on WTO rules. These require a
common set of tariff rates to be applied to all countries where no free trade deals exits
Unclear what the arrangements on customs would apply after transition period ends.
UK wants ‘a new customs partnership’ or ‘highly streamlined customs arrangements’
But EU will not allow integrity of Single market and ECJ to be undermined
It may be 2021 or later before we know what Brexit truly means
SMEs pessimistic about Brexit
But, despite uncertainty, upbeat Irish economic indicators
20
40
60
80
100
120
Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17
Consumer Confidence (ESRI - KBC)
Source: ESRI - KBC, Thomson Datastream
-10
-8
-6
-4
-2
0
2
4
6
8
10
Q3 2007 Q3 2009 Q3 2011 Q3 2013 Q3 2015 Q3 2017
Irish Retail Sales (ex-autos) - Volume, YoY, %
Source: Thomson Datastream
%
-40
-30
-20
-10
0
10
20
30
40
Q2 2007 Q2 2009 Q2 2011 Q2 2013 Q2 2015 Q2 2017
Construction Investment(Volume, 3 Qtr Moving Average, YoY% Change)
Source : CSO
%
30
35
40
45
50
55
60
65
70
Oct-07 Oct-09 Oct-11 Oct-13 Oct-15 Oct-17
Ireland Mfg and Services PMIs
Source: Thomson Datastream, Investec
Services
Manufacturing
Unemployment falls sharply on strong economic growth
4
6
8
10
12
14
16
Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17
Unemployment Rate (%)
Source: Thomson Datastream
%
-8
-6
-4
-2
0
2
4
6
Q2 2010 Q2 2011 Q2 2012 Q2 2013 Q2 2014 Q2 2015 2016Q2 2017Q2
Employment (YoY, %)
Public
Private
Total
Source: Thomson Datastream, CSO
%
-5
0
5
10
15
20
Q2 2007 Q2 2008 Q2 2009 Q2 2010 Q2 2011 Q2 2012 Q2 2013 Q2 2014 Q2 2015 Q2 2016 Q2 2017
Irish Exports of Services(Volume, 3 Qtr Moving Average, YoY% Change)
Source : CSO
-6
-4
-2
0
2
4
6
8
Q2 2011 Q2 2012 Q2 2013 Q2 2014 Q2 2015 Q2 2016 Q2 2017
Core Domestic Spending* (3 Qtr MA, % Yr-on-Yr)
Source: CSO, AIB ERU Calculations*Domestic Spending excluding investment in aircraft and intangibles
%
Debt ratios fall, budget deficit nearly eliminated
50
60
70
80
90
100
110
120
130
2010 2011 2012 2013 2014 2015 2016 2017(f) 2018(f) 2019(f) 2020(f)
Government Debt Ratios (%)
Sources: Dept of Finance, Irish Fiscal Council, AIB ERU (Note Inflated/ Distorted GDP figues from 2015)
Gross General Gov Debt/ GDP Ratio
Net Gov Debt (i.e. ex cash & liquid assets)
/ modified Gross National Income Ratio
%
-12
-10
-8
-6
-4
-2
0
2
2010 2011 2012 2013 2014 2015 2016 2017(f) 2018(f) 2019(f) 2020(f)
General Government Balance* (% GDP)
Source : Dept of Finance*Excludes banking recapitalisation costs in 2010-11
-2
0
2
4
6
8
10
12
-2
0
2
4
6
8
10
12
Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17
Irish Benchmark Yields
5 Year 10 Year Source: Thomson Reuters
% %
100
120
140
160
180
200
220
240
Q2 2003 Q2 2005 Q2 2007 Q2 2009 Q2 2011 Q2 2013 Q2 2015 Q2 2017
Irish Household Debt (% of Disposible Income)
Source: CSO, Central Bank, AIB ERU
%
% change in real terms unless
stated
2017 (f) 2018 (f) 2019 (f)
GDP 4.5 3.5 3.0
GNP 3.0 3.0 2.5
Personal Consumption 2.5 2.5 2.5
Government Spending 2.0 2.0 2.0
Fixed Investment 4.0 6.0 5.0
Core Fixed Investment* 7.0 6.0 5.0
Exports 4.0 4.0 4.0
Imports 2.0 4.3 4.2
HICP Inflation (%) 0.3 1.0 1.3
Unemployment Rate (%) 6.2 5.2 4.7
Budget Balance (% GDP) -0.3 -0.2 -0.1
AIB Irish Economic Forecasts
*Excludes investment in aircraft and intangibles
Construction picking up from still low output levels
Budgetary policy turns mildly expansionary
Activity supported by low interest rate environment
FDI strong despite concerns on corporate tax
Very low Irish inflation, well below Eurozone and UK
Global economy, including the Eurozone, picking up
However, Brexit is a major challenge for economy
Sharp fall in sterling impacts exports to UK & tourism
Irish GDP grew by a strong 5.1% in 2016
Irish GDP growth generally forecast at around 4.5% for 2017 and circa 3.5% in 2018
ESRI estimate long-term growth rate of economy at around 3.5% in 2016-2025 period
Solid Irish growth to continue as Brexit looms
Risks to the Irish economic recovery Main risks to Irish recovery no longer internal but external, in particular Brexit
Brexit major issue for Ireland given its strong trading links with UK and sharp fall by
sterling
Possibility of reduced FDI from US if Trump administration slashes corporate taxes
Questions around Irish corporation tax regime (Apple ruling, calls for tax harmonisation
in EU) could impact FDI, but Ireland can veto any proposed EU tax changes
Supply constraints in new house building activity, which is recovering at a slow pace with
output still at very low levels
Competitiveness issues - high Dublin house prices, high rents, high personal taxes
Continuing credit contraction – fewer banks, tighter credit conditions, on-going
deleveragingNote: 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
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