Hard to see Brexit as positive for Ireland

The polls pointed to a close run thing in terms of the Brexit vote, albeit with Remain pulling marginally ahead , but the markets had convinced themselves that the probability of a Leave vote was virtually zero. Behavioural economists talk of  Narrative Fallacy and Confirmation bias ( we convince ourselves that our interpretation of events is true and ignore any conflicting evidence) and those concepts seem to capture what developed in the FX and equity markets in the days before the referendum. Consequently, the subsequent carnage in markets  can in part be explained by traders and investors scrambling to exit positions that had gone horribly wrong.

Any short term bounce from oversold readings may be short lived, however, as it seems fairly clear that the uncertainty of Brexit alone will hit economic activity, not just in the UK but across Europe and beyond; consumers are likely to become more cautious, resulting in higher saving and reduced spending, with firms  postponing or even abandoning  investment plans. The plunge in equities has hit household wealth and house prices are also likely to be adversely affected. Bond yields have fallen again and we may well see lower short term rates as well, so further reducing the income of savers and putting an additional squeeze on bank margins.

Any  change in UK activity impacts Ireland ( some studies suggest a 1% reduction in UK GDP reduces Irish GDP by 0.25%) and the export sector would obviously also  be impacted by weaker euro zone growth. Domestic demand in Ireland  may also take a hit, as consumers and firms react to the uncertainty caused by this seismic event. Short term FX moves may not have a huge impact but it appears likely that sterling may be marked down for a long period, so putting margin pressures on Irish SME’s trading with the UK.That uncertainty may well last some time, even if market volatility settles down;  it is up to the UK to trigger Article 50 and the exit negotiations, with the latter taking two years at least, so this is not a short-term event.

On the positive side some argue that Brexit is an opportunity for this country, in that firms may leave London and other parts of the UK and move to EU States in order to secure access to the single market. Financial services, in particular, is seen as ripe for such a  migration.

That belief ignores the reality of the current economic situation in Ireland; there are huge capacity constraints in a host of areas, including housing, commercial property, education, hospitals and infrastructure, particularly in and around the Capital. Consequently it is hard to see how Dublin could absorb a swathe of large financial institutions locating here-  residential rents are already at record highs, for example, so the influx of highly paid financial professionals  is likely to put further pressure on accommodation in Dublin.

Over time, capacity can be increased, of course, but Public capital spending under the Government’s latest plan is set to rise to only 2.7% of GDP by 2021, which is very low by EU standards and woefully inadequate given years of spending cuts. Ireland can therefore not absorb large numbers of firms even if they did wish to relocate here and if one adds the other short term negatives discussed above  it is hard to make the case that Brexit is good for Ireland in any economic sense.