Brexit woes can turn to gains for Irish business

After the UK parliament provided its backing for the EU withdrawal bill, the British Prime Minister told MPs that “this will be a defining moment for our whole country as we begin to forge the new relationship with Europe and a new role for ourselves in the world”.

However, one of the most striking aspects of what has transpired since the June 23 referendum has been the distinct lack of detail on how this new relationship is supposed to work.

The EU (Notification of Withdrawal) Bill consisted of only 133 words and two clauses. Article 50 has just under twice as many words. Together they would fit comfortably on a single page.

Until recently, the impact of Brexit was most felt in the currency markets, where sterling has weakened. This move has put severe pressure on many Irish exporters, particularly in food, manufacturing and tourism.

However for many in the UK, it has seemed like business as usual post Brexit, with the sharp downturn most forecasters — including this one — predicted would immediately follow a Leave vote failing to materialise.

But what we have seen up until now may represent the calm before the Brexit storm. While the UK Office of Budget Responsibility now sees stronger growth in the short term, it has pulled back its forecasts for the coming years. A sign of things to come was recent data on UK wage growth. Nominal single month wages are currently rising at an annual rate of 1.7%, just below the 1.8% year-on-year rise in consumer prices.

In other words pay growth is lagging behind inflation, so consumers’ purchasing power is starting to be eroded — a key issue for the UK, given that personal consumption accounts for more than 60% of its GDP.

Household finances are not the only domestic headache for Theresa May. While two House of Lords revolts over Brexit were eventually put down, they showed her government is not unassailable in parliamentary votes. The Scottish Nationalist’s call for a second independence referendum caused further ructions. Domestic distractions are the last thing May needs when she is preparing to engage with the 27 continuing EU members.

How these discussions play out will have significant consequences for Ireland. The euro-sterling currency pair is the single most important one for indigenous exporters, and the twists and turns of Brexit negotiations will likely contribute to heightened volatility in the exchange rate.

Irish companies would be wise to consider the effects of such volatility on their profitability and contemplate tactics such as hedging to address this. Furthermore, with market-friendly outcomes to Dutch and French elections now increasingly likely, the political risks now seem to be increasingly stacked on the UK.

Apart from exchange rates, uncertainty around the UK’s future trading arrangements is weighing on business investment across the Irish Sea. The latest official data show this declined at an annual rate of 0.9% in Q4 2016. Some of this softness may be temporary, as some firms are undoubtedly playing wait-and-see on how the Brexit discussions go, but it is also clear the UK is losing out to other jurisdictions, including this one.

From Ireland’s perspective, elevated euro-sterling volatility and an uninspiring outlook for UK consumers are clearly unhelpful given Britain’s importance as a trading partner. However these negative effects can be mollified if Ireland can win an even greater share of foreign direct investment from firms seeking unfettered access to the single market that the UK government has decided to no longer provide.

Philip O’Sullivan is chief economist with Investec Ireland

From Irish Examiner (20/3/2017)