Hard Brexit will trigger domestic recession, Central Bank warns

The Central Bank has warned of a "marked deterioration in economic conditions" in the event of the no-deal Brexit with the domestic economy effectively falling into recession next year.

In its latest quarterly bulletin, the bank said a hard Brexit would result in 73,000 fewer jobs by the end of 2021, an unemployment rate of nearly 7 per cent, and a significant decline in consumption and investment.

While headline growth would still be positive because of the Republic’s large export sector, the domestic economy would contract, it said.

“While considerable uncertainty necessarily attaches to estimates from an exercise of this type, a disorderly, no-deal Brexit would present enormous challenges and result in a significant loss of output and employment compared to a no Brexit scenario,” the bank said.

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The stark warning comes just three weeks before the UK’s scheduled exit from the bloc and at a time of stalling growth across the euro zone.

In its report, the Central Bank highlighted the potential “divergent paths” for the Irish economy depending on the outcome of Brexit process.

Unprecedented

"This is the first time the Central Bank has published two forecasts for the Irish economy, and this is due to the extraordinary and unprecedented nature of the Brexit process," the bank's director of economics and statistics, Mark Cassidy, said.

“In the event that a no-deal Brexit were to occur there would be a significant weakening of activity across many parts of the economy,” he said.

“Regions and sectors which are more reliant on trade with the UK and which are more vulnerable to the imposition of tariffs and non-tariff barriers, particularly sectors such as agriculture, food and the broad SME sector, are likely to be more adversely affected,” Mr Cassidy said.

If a no-deal Brexit can be avoided, the bank predicted the Irish economy would grow by 5 per cent this year in gross domestic product (GDP) terms, an upgrade on its previous assessment, before easing to 4.3 per cent next year and 3.9 per cent in 2021.

In these circumstances, unemployment would also fall to a new post-crash low of below 4.8 per cent next year. On current trends, it said the labour market would be at full capacity “within the forecast horizon”.

Overheating

This combined with the continuing strength of domestic demand highlighted the need to guard against “overheating dynamics” but it stopped short of saying the economy was showing signs of overheating.

When employers chase a shrinking pool of labour, wages get bid up, which in turn forces the company to put up their prices. When such a wage-price spiral develops it can be difficult to halt.

The Central Bank forecast wage growth, a key indicator of overheating, would grow by 3.6 per cent this year and by 4.2 per cent in 2020, albeit the pick-up in wages would be spread unevenly across different sectors.

In its report, it stated that Brexit was not the only external risk to the Irish economic outlook, noting that the outlook for global economic activity had continued to worsen in recent months.

"Given the position of Ireland as a small, highly open economy, the state of global economic conditions has an important bearing on Irish economic performance. Risks in relation to trade and taxation also persist," it said.