RBK & AIB Backing the Midlands Corporate Sector Welcome & Introduction Gerard Corcoran Head of AIB Meath, Westmeath & Longford Retail & Business Banking T: (046) 903 7850 E: Gerard.j.Corcoran@aib.ie Dermot Ryan Head of Business Banking, Meath, Westmeath & Longford T: (086) 772 5128 E: Dermot.f.ryan@aib.ie
The Challenge of Brexit for Ireland November 2017 John Fahey Senior Economist AIB 2
City of London Sterling Customs & Tariffs Northern Ireland/ Scotland BREXIT Transition Arrangement Migration Trade Deal Future of the EU
Does the UK know what it wants? Financial Times 16 th Dec 2016
Brexit is a major challenge for Ireland 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 Trade with UK equates to 35% of Irish UK takes GDP. Thus, some it 40% is a key of Irish indigenous firms exports, so very important market trading partner Common labour market with UK Common Travel Area pre-dates EU membership UK takes 43% of Irish indigenous Expected firm negative exports, impact so of Brexit on UK economy will have knock-on effect on very Irish important exports trading to UK partner Expected Common negative land impact border of with the UK Northern Ireland Brexit on UK economy will have knock-on A lot of effect cross in country Ireland investment between Ireland and the UK, especially in retailing, agri-food, banking, insurance, energy Sterling has fallen sharply on Brexit concerns, which will hit exports to UK
Brexit brings risks and opportunities 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 Trade Ireland with UK equates to 35% of Irish GDP. Thus, it is a key Border trading with partner Northern Ireland will become an external EU land border, with possible Customs checks and other restrictions on free movement of goods UK takes 43% of Irish indigenous Ireland will firm lose exports, key so ally within EU when UK leaves as share similar views on very taxation, important regulation, trading partner state involvement in economy etc. Expected negative impact of Brexit will see an outflow of investment and jobs from the UK to EU countries, Brexit on UK economy will have knock-on including effect Ireland, in Ireland especially in financial services Sterling Brexit has will fallen provide sharply Ireland on with a big advantage over UK in competing for global Brexit FDI concerns, coming which into Europe will hit that needs full, unfettered access to EU markets exports to UK
Brexit expected to lower growth rate of Irish economy Impact of Brexit on Output (% deviation from base) 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
WTO Tariffs/Customs controls likely in Hard Brexit Membership of WTO UK would need to negotiate full membership of WTO and begin international trade talks with many countries, including EU WTO Rules No Trade Agreement / access to Single Market 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
Tariffs and non-tariff barriers both problematic for trade Non-Tariff Barriers Rules of Origin for Goods Standards of Production (inspections) Transport Licenses Delays, Physical inspections Increased Admin Costs
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 Share of Exports by Industry Destined for the UK (ESRI) 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0%
Impact will be regional\sectoral with winners\losers 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 Trade with UK equates to 35% of Irish Underpin GDP. Thus, the housing it is a key and CRE markets in Dublin and its hinterland trading partner Negative for border counties and rural economies dependent on agri/tourism, especially UK takes 43% if customs of Irish controls and tariffs introduced indigenous firm exports, so very Tourism important already trading seeing partnera fall-off in UK numbers owing to weak sterling Expected Could negative be a sharp impact drop of in market prices in UK if existing tariffs removed on food Brexit on UK economy will have imports. Irish beef and cheese sectors particularly vulnerable as key export market knock-on effect in Ireland Sterling Longer has term, fallen sharply there could on be increased FDI into Ireland if UK loses free access to EU Brexit markets concerns, Financial which will services, hit IT, Pharma, healthcare sectors most likely to benefit exports to UK
Sharp fall of sterling adds to Brexit concerns 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 Trade Irish with exporters UK equates to UK to 35% are small firms with no Treasury function of Irish so GDP. don t Thus, hedge it is currency a key exposure trading partner Cross border trade picks up as shoppers head North following sterling's big fall. UK takes 43% of Irish Big indigenous rise on-line firm sales exports, going so to the UK very important trading partner Sterling weakness has already seen a big fall-off in tourist numbers from the UK this year Expected negative impact of Irish Brexit firms, on UK though, economy have will become have used of sterling trading in weak knock-on and volatile effect fashion in Ireland in past decade EUR/GBP Sterling has entered fallen sharply a 87-92p on trading band in past six months Brexit concerns, which will hit exports to UK 0.96 Euro / Sterling Exchange Rate 0.92 0.88 0.84 0.80 0.76 0.72 0.68 Nov-15 May-16 Nov-16 May-17 Nov-17 Source: Thomson Datastream
1.00 FX Market Outlook Euro / Sterling Exchange Rate 0.90 0.80 0.70 0.60 Nov-03 Nov-05 Nov-07 Nov-09 Nov-11 Nov-13 Nov-15 Nov-17 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
Exit Negotiations Timeline? 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 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 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
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 70 65 60 55 50 45 40 Ireland Mfg and Services PMIs Services Manufacturing % 40 30 20 10 0-10 -20 Construction Investment (Volume, 3 Qtr Moving Average, YoY% Change) 35 30 Oct-07 Oct-09 Oct-11 Oct-13 Oct-15 Oct-17 Consumer Confidence (ESRI - KBC) Source: Thomson Datastream, Investec 120 100 80 60 40 20 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 Source: ESRI - KBC, Thomson Datastream -30-40 Q2 2007 Q2 2009 Q2 2011 Q2 2013 Q2 2015 Q2 2017 Source : CSO % 10 Irish Retail Sales (ex-autos) - Volume, YoY, % 8 6 4 2 0-2 -4-6 -8-10 Q3 2007 Q3 2009 Q3 2011 Q3 2013 Q3 2015 Q3 2017 Source: Thomson Datastream
Unemployment falls sharply on strong economic growth 20 Irish Exports of Services (Volume, 3 Qtr Moving Average, YoY% Change) % 8 Core Domestic Spending* (3 Qtr MA, % Yr-on-Yr) 15 6 4 10 2 5 0-2 0-4 -5 Q2 2007 Q2 2008 Q2 2009 Q2 2010 Q2 2011 Q2 2012 Q2 2013 Q2 2014 Q2 2015 Q2 2016 Q2 2017 Source : CSO % 6 Employment (YoY, %) Private 4 2 Total 0-6 Q2 2011 Q2 2012 Q2 2013 Q2 2014 Q2 2015 Q2 2016 Q2 2017 *Domestic Spending excluding investment in aircraft and intangibles Source: CSO, AIB ERU Calculations % 16 14 12 Unemployment Rate (%) -2-4 -6 Public 10 8 6-8 Q2 2010 Q2 2011 Q2 2012 Q2 2013 Q2 2014 Q2 2015 2016Q2 2017Q2 Source: Thomson Datastream, CSO 4 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 Source: Thomson Datastream
Debt ratios fall, budget deficit nearly eliminated % 130 Government Debt Ratios (%) % 240 Irish Household Debt (% of Disposible Income) 120 220 110 100 Net Gov Debt (i.e. ex cash & liquid assets) / modified GrossNational Income Ratio 200 90 180 80 160 70 Gross General Gov Debt/ GDP Ratio 140 60 120 2 50 2010 2011 2012 2013 2014 2015 2016 2017(f) 2018(f) 2019(f) 2020(f) Sources: Dept of Finance, Irish Fiscal Council, AIB ERU (Note Inflated/ Distorted GDP figues from 2015) General Government Balance* (% GDP) 100 Q2 2003 Q2 2005 Q2 2007 Q2 2009 Q2 2011 Q2 2013 Q2 2015 Q2 2017 Source: CSO, Central Bank, AIB ERU Irish Benchmark Yields % % 12 12 0-2 -4-6 10 8 6 4 10 8 6 4-8 2 2-10 0 0-12 2010 2011 2012 2013 2014 2015 2016 2017(f) 2018(f) 2019(f) 2020(f) *Excludes banking recapitalisation costs in 2010-11 Source : Dept of Finance -2-2 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 5 Year 10 Year Source: Thomson Reuters
Solid Irish growth to continue as Brexit looms 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 AIB Irish Economic Forecasts % 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 *Excludes investment in aircraft and intangibles
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 deleveraging Note: 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 Street, Belfast BT1 3HH. Registered Number NI 018800. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. In the United States of America, Allied Irish Banks, p.l.c., New York Branch, is a branch licensed by the New York State Department of Financial Services. Deposits and other investment products are not FDIC insured, they are not guaranteed by any bank and they may lose value. Please note that telephone calls may be recorded in line with market practice.