Another week, another report on the costs of a hard Brexit. Ireland, unlike the UK, has shown a willingness to engage in open and frank debate on Brexit costs. So, how much will it hurt?
The report from Copenhagen Economics, on Brexit, was the latest in a series – the ESRI, the government, the EU- that have shown the effect that Brexit will have on Ireland. The details differ in each case but the message is the same. Even the softest Brexit will have a negative effect on Ireland. In no way can it be seen as a friendly act.
A sense of perspective is needed, however. There has been some hysterical commentary about Brexit and its impact on Ireland. Some commentators have suggested that it could even be worse than the economic crisis of the mid-noughties. The effects are being presented as Ireland losing billions, being worse off etc.
This is , almost certainly, bunkum.
First, lets see what happened back in the crisis, for perspective. Then lets compare that to the most apocalyptic Brexit scenarios. That is a reasonable benchmark as the unreasonable, unreasoned, unhinged UK government approach is careering them towards a diamond hard Brexit. There remains some hope that the imbroglio that is Northern Ireland can act as a break on that, but that imples an outbreak of common sense and longterm perspective from the DUP, so lets not hold our breath.
Lets revisit the crisis. Lets define its acute phase as 2006-2013. Most of the main aggregate economic indicators peaked in 2006 or 2007 and most had bottomed out by 2011 or so. So how bad? Personal consumption of goods and services fell by 13% ; net spending by government on current goods and services fell by 15%; spending on capital formation (which includes but is not only houses) fell by a staggering 70% ; GDP fell by 16%, GNP by 15% and Gross National income by 20%. These are real, actual, cash losses.
Measuring by GNI the economy was €30b smaller in 2011 than it had been just four years earlier. Jobs were lost also. Employment peaked at 2.237m person in Q4 2007. By Q3 2012 it had bottomed out at 1.875m, nearly 18%, some 361,000 persons less in employment than just a few years before. Half of this fall was attributable to a collapse in construction employment but all sectors were hit. Government revenue also took a battering, even with the widening of tax bands and bases. Exchequer receipts fell 40% or more from a high of 16.5b in Q4 2007 to 9.7b in Q4 2009.
This was a real, hard, battering across the economy. The collapse of the economy in 2007-9 was stupendous. And it was real.
By contrast, the studies on the likely effect of even a diamond hard Brexit are cheerful reading. No study suggests a contraction of the economy. Instead what is forecast is that the economy will not be as large in the presence of Brexit than it would otherwise have been. A figure for this loss of potential output in the order of 7-9% is the norm across studies. This is also over a 10-15y horizon. even a diamond hard Brexit are cheerful reading. No study suggests a contraction of the economy. Instead what is forecast is that the economy will not be as large in the presence of Brexit than it would otherwise have been. A figure for this loss of potential output in the order of 7-9% is the norm across studies. This is also over a 10-15y horizon.
A figure for this loss of potential output in the order of 7-9% is the norm across studies. This is also over a 10-15y horizon. Let’s not even compare that to loss of actual output of 20% across a four year period.
A further wrinkle is on the sectoral impact. As the construction industry collapsed, taking with it the tax revenues it had generated, this rippled through the economy a a whole. Here , even in a hardest Brexit, the pain is spread, albeit not across all sectors. Five sectors – agrifood, pharma, electrical machinery, wholesale and retail and air transport-will account for over 90% of the effect of Brexit on the economy. The two biggest hit are agrifood and pharma with Pharma being in fact the hardest hit. A key distinction here is that Pharma is a much less labour intensive industry than agrifood. Thus the labour market impact of Brexit will be in effect concentrated in one sector –the agrifood sector.wholesale and retail and air transport-will account for over 90% of the effect of Brexit on the economy. The two biggest hit are agrifood and pharma with Pharma being in fact the hardest hit. A key distinction here is that Pharma is a much less labour intensive industry than agrifood. Thus the labour market impact of Brexit will be in effect concentrated in one sector –the agrifood sector. even here we are talking about slower growth over a long time than actual contraction over a short time. Must of this comes from reduced UK exports and most of that from non trade barriers in an hard Brexit. Anything which sees the UK remain close to a Norway or Swiss style deal reduces the effects to margin of forecast error levels.
Paradoxically this makes managing it harder in some ways. When the whole country is going to hell in a handbasket the state can make the broad changes needed. When it is only one sector that sector will need to be extremely vocal and also extremely nimble. Although the agrifood sector has been reducing its dependence on the uk over the years the reality is that this has not taken place at the same pace as the economy overall. Brexit represents a shock to the core of the irish agrifood system but as it is happening it needs to be taken as an opportunity. There are good government plans in place, in contrast to the UK continued reliance on hope and hype, but these can only go so far. At the end, the participants in the sector need to drive their products to other, more lucrative but more difficult markets.Brexit represents a shock to the core of the irish agrifood system but as it is happening it needs to be taken as an opportunity. There are good government plans in place, in contrast to the UK continued reliance on hope and hype, but these can only go so far. At the end, the participants in the sector need to drive their products to other, more lucrative but more difficult markets.
Brexit will hurt. It is pointless, and heedless. But it seems that the UK is intent on it. We are blessed with a functioning, competent political and governance system that will mitigate as much as possible the effects of this homegrown act of sociopolitical pique by our neighbors. The economywide effects will be slower growth not actual contraction. Placed in that context the notion that we would consider exiting the EU alongside the UK becomes even more delusional.
This is a longer version of an Irish Examiner column 19/02/18
Brian M. Lucey 