A British exit from the EU could have a “negative” impact on Ireland’s growth, exports, labour market and financial sector, the Central Bank has warned.

It said the scale of the impact would depend on the extent to which UK-EU trade, labour mobility and financial interactions were restricted after departure from the union. The bank’s assessment of a “Brexit” is set out in a note with its new macro-financial review, a twice-yearly examination of conditions underpinning the financial system and financial markets.

The review warned of increased uncertainty in the international economy, saying investors’ pursuit of higher returns in the low interest rate environment could lead to financial sector risks.

Indigenous firms

With Britain’s EU referendum to be held by the end of 2017, the Central Bank said the UK market remained particularly important for indigenous firms even though the Irish economy as a whole was less reliant on it.

“Some sectors, including agri-food, clothing and footwear, tourism and computer and financial services continue to have a relatively high dependency on exports to the UK and, consequently, would be affected disproportionately,” it said.

“The impact of a Brexit on the Irish financial sector, including banks, insurance firms and non-bank financial intermediaries, could be significant if it occurred in a disorderly manner and/or had a large negative impact on the UK economy. . .

“In addition, any potential shift in foreign direct investment from the UK to Ireland could lead to an increase in the size of the sector and would have an impact on supervision.

“For the banking sector, the impact on profitability could occur as a result of any slowdown in the UK economy and/or property market; spillover effects to the Irish economy, particularly through reduced lending to corporate/SME exporters dependent on UK economic conditions; financial market effects; and/or restricted access to UK markets.”

The review found that the outlook for the Irish economy has improved. However, the global outlook has weakened amid concern that the slowdown of growth China economy is more pronounced than anticipated.

“I think it is fair to say that the major risk to financial stability at both the domestic and international level at this moment in time is the potential for excessive risk-taking by investors seeking better returns across investment classes in the current low-yield environment,” said Central Bank chief economist Gabriel Fagan.

Asset prices

“Now, any increase in risk aversion which would lead to a reversal of this search for yield could pose financial stability risks both in Ireland and at a global level.” The review warned of a “rapid decline” in asset prices in the event of investor sentiment changing, official interest rates rising or an adverse economic or financial event.

Mark Cassidy, head of financial stability at the bank, cited particular risks emerging from emerging market economies but also “to a lesser extent” from low growth in the euro zone. “These external risks are particularly relevant for us here in Ireland because we are such an open economy but also because following the crisis a number of legacy issues remain, which leave our economy vulnerable to higher interest rates in the coming years but also to any economic and financial market shocks which might occur in the global environment ,” Mr Cassidy said .

The review said gross domestic product is forecast to expand by 4.7 per cent in 2016 after 5.8 per cent growth in 2015.

“Stronger domestic demand is evident, supported by an improving labour market and rising real wages,” it said.