ESRI Report on Ireland and Brexit: Discussion

I remind members and delegates to turn off their mobile phones as interference caused by them affects the transmission of the proceedings.

From the Economic and Social Research Institute, ESRI, I welcome Dr. Adele Bergin, senior research officer, and her colleague, Dr. Kieran McQuinn, research professor. I gather Dr. Martina Lawless who co-authored the research is, unfortunately, unable to attend the hearing, the purpose of which is to examine the detailed analysis of the impact on Ireland of the different types of Brexit. The ESRI and the Department of Finance recently published the detailed analysis. The committee's focus is on the budgetary and fiscal impact of Brexit. Given ongoing events at Westminster, it is timely that we are discussing this topic, although that could probably have been said on any day in the past few weeks. I am grateful to the director of the ESRI, Professor Alan Barrett, for facilitating our request for a meeting on this important research.

By virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the committee. However, if they are directed by it to cease giving evidence on a particular matter and continue to so do, they are entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person or entity by name or in such a way as to make him, her or it identifiable.

Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official, either by name or in such a way as to make him or her identifiable.

I thank Dr. Bergin for attending and invite her to make her opening statement.

Dr. Adele Bergin

I thank the Chairman for the invitation to the ESRI to appear before the select committee. I am joined by my colleague Dr. Kieran McQuinn who is head of economics at the ESRI. We have been asked to discuss a recent paper entitled, Ireland and Brexit: Modelling the Impact of Deal and No-Deal Scenarios, which was published in the spring 2019 quarterly economic commentary. The paper attempts to quantify the macroeconomic impact of Brexit on the economy. I will start by summarising the range of scenarios considered and then outline some of the key findings for the macroeconomy, trade, the labour market, households and the public finances.

Owing to the current heightened political uncertainty in the United Kingdom, we consider a range of Brexit scenarios. We also acknowledge the uncertainty surrounding any assessment of the economic impact of Brexit, as there is no precedent for a country leaving a major and closely integrated trading bloc such as the European Union. The paper considers three scenarios which we describe as deal, no-deal and disorderly no-deal. To estimate the economic impact of each scenario, we compare them to a counterfactual scenario where the United Kingdom remains in the European Union. In the deal scenario the United Kingdom makes an orderly agreed exit from the European Union. This involves a transition period to the end of 2020 and a free trade agreement between the United Kingdom and the EU 27 being in place thereafter. In the no-deal scenario the United Kingdom exits the European Union without a deal, but there is an orderly period of adjustment for trade. Ultimately, World Trade Organization tariff arrangements will apply to goods trade, there will be non-tariff measures and the services trade will also be negatively impacted on. In the disorderly no-deal scenario the United Kingdom exits the European Union without a deal and there is additional disruption to trade in the short run, above that considered in the no-deal scenario.

Our analysis focuses on the best understood channels through which Brexit will affect Ireland, namely, though lower trade, incorporating the impact of tariff and non-tariff measures and the potentially positive impact of foreign direct investment diversion to Ireland. Our approach is to build estimates for each of these channels from a range of recent Brexit microeconomic studies; therefore, our estimates are anchored in empirical literature. We use these microestimates to calibrate macroeconomic scenarios. Specifically, we generate alternative paths for the UK and international economy using the national institute global econometric model, NiGEM, of the National Institute of Economic and Social Research in the United Kingdom and assess the impact on Ireland using the ESRI's core structural model, COSMO, macroeconometric model. The impact of each Brexit scenario is considerable and will have negative effects on the macroeconomy and throughout the economy on trade, the labour market, the household sector and the public finances. I will briefly outline the key impacts for each of them.

The macroeconomic effects of Brexit are significant and negative for the economy. We find that GDP, the level of output in Ireland, in the longer term could be approximately 2.6% lower in a deal scenario, 4.8% lower in a no-deal scenario and 5% lower in a disorderly no-deal scenario, compared to a situation where the United Kingdom stays in the European Union. While some of the effects may not appear substantial, it has to be borne in mind that the impacts will cumulate over a long period of time. In each scenario the level of Irish output is below where it otherwise would be. The negative impact on Irish output in the long run in the deal scenario is approximately half that in the no-deal scenario. Although these are substantial relative reductions in the level of output in the long run, the economy will continue to grow but at a slower pace as a consequence of Brexit. If we assume the economy would grow by an average of 3% per annum in the long run if the United Kingdom were to stay in the European Union, the impact of Brexit is roughly equivalent to a 0.3% reduction in the long-run growth rate in the deal scenario and around 0.6% in the long-run growth rate in the no-deal and disorderly no-deal scenarios.

There is more uncertainty surrounding the short-run impact of Brexit as it depends on how smooth any transition to the future arrangements between the United Kingdom and the European Union is. Our results suggest that, by 2020, the level of real output in the economy could be approximately 0.6%, 1.2% and 2.4% lower in the deal, no-deal and disorderly no-deal scenarios, respectively. These results are compared to a situation where the United Kingdom remains in the European Union.

On trade, our results also indicate that firms will be negatively affected as a result of Brexit. The negative trade shock will reduce the demand for Irish exports and Irish firms will be affected by the depreciation in sterling, which will reduce our competitiveness. Our results indicate that exports, in the long run, will be 4.6% lower in a deal scenario, 8.1% lower in a no-deal scenario and 8.3% lower in a disorderly no-deal scenario, compared with a situation where the UK stays in the EU.

On the labour market, lower output in the long run, compared with a situation where the UK remains in the EU, will result in lower labour demand, which has knock-on impacts for employment and the unemployment rate. Our results indicate that employment, in the long run, would be 1.8% lower in a deal scenario, 3.2% lower in a no-deal scenario and 3.4% lower in a disorderly no-deal scenario, compared with a situation where the UK stays in the EU. This represents around 40,000 fewer jobs created in the long run in a deal scenario and around 80,000 fewer jobs created in the long run in the two no-deal scenarios. Again, it is important to state that employment will continue to grow in each scenario but at a slower pace than compared with a situation where the UK remains in the EU. In the long run, the unemployment rate is 1% higher in the deal scenario and roughly 2% higher in the two no-deal scenarios, compared with a situation where the UK stays in the EU.

For households, the impact of Brexit will be severe. Our results indicate that real personal disposable income, in the long run, would be 2.2% lower in a deal scenario, 3.9% lower in a no-deal scenario and 4.1% lower in a disorderly no-deal scenario, compared with a situation where the UK stays in the EU. This is driven by lower employment, lower wages and higher prices. As a result, consumption will be lower in the long run. Furthermore, households will face higher prices as a result of the imposition of tariffs or other increases in trading costs that could be passed on as increased prices for Irish consumers.

On public finances, with both output and employment below where they otherwise would have been in the absence of Brexit, Government revenue from taxes will be lower and the increase in the unemployment rate would lead to higher Government spending on welfare payments. The net effect is a deterioration in the general government balance, GGB, as a percentage of GDP. In the long run this could reduce the GGB by around 0.5% in a deal scenario and by around 0.9% in a no-deal and disorderly no-deal scenario. We have also looked at the short-term forecasts for the public finances from the spring 2019 quarterly economy commentary, QEC, and have examined the implications of Brexit for the public finances in the short run. The short-term forecasts for the public finances in the recent QEC are done on the basis of a no-Brexit scenario. They show a deficit on the GGB of 0.3% of GDP in 2019 and a deficit of 0.4% of GDP in 2020. This is equivalent to €900 million in 2019 and €1.5 billion in 2020. Our results suggest that for 2019, the impact of our deal and no-deal scenario is more limited on the GGB. However, the deficit on the GGB could be 0.2% higher, which is roughly €700 million in the case of a disorderly no-deal scenario. In 2020, the deficit on the GGB could be around 0.1% higher in our deal or no-deal scenarios, which is equivalent to €200 million and €400 million, respectively, and 0.3% higher, or €1.1 billion, in the disorderly no-deal scenario. In each of these scenarios, we assume there is no explicit fiscal policy response to the change in the economic environment.

I thank members for their attention. My colleague and I would be delighted to take any questions they may have.

I thank Dr. Bergin for her opening remarks. I have a number of members who have indicated they wish to speak so in the order in which members have indicated I call Deputy Lisa Chambers.

I thank Dr. Bergin for her opening statement. Brexit obviously poses one of the most significant challenges and threats to our economy that I will probably ever see in my lifetime and certainly for many years. Dr. Bergin speaks about three different scenarios. Can she explain what she means by a managed no-deal scenario because my understanding is that this is not actually on the table. It is either a deal or it is no deal and the transition period to 2020 is contingent on a deal being ratified. Consequently, why did the ESRI choose to explore a scenario that the European Union has ruled out?

Dr. Adele Bergin

I thank the Deputy for that question. Let me try to clarify this. We know that in the long run, the relationship between the UK and the EU will change and as a result we know that the level of output in the Irish economy will be below where it otherwise would have been. When we think about a no-deal scenario, there is more uncertainty around the potential short-run impact of Brexit. We do not know whether the adjustment to this new relationship will be more sudden or more gradual. We can also imagine a situation where there could be additional disruption in the short run, which is what we have done in our disorderly no-deal scenario. The fact that we have called it a no-deal scenario where we have suggested that there will be a more orderly period of adjustment for trade is not assigning it to a particular scenario to which the EU or anyone has or has not agreed. It is more saying that the adjustment to the long run will be more gradual. What we are also trying to do in terms of having a disorderly no-deal scenario is to allow for the fact that there could be additional disruption in the short run. We felt that we had to consider a range of different scenarios to try to capture what may actually happen.

I should have said at the very start before I brought the Deputy in that our normal rules are to allow approximately five minutes per member for questioning and then a second round should it be required.

Just to be clear, the middle scenario of no deal is not based on there being a transition period? That is still a cliff-edge, no-deal scenario?

Dr. Adele Bergin


That was my point. I will run through my questions all together, that might be a bit easier. The Parliamentary Budget Office issued a report not so long ago highlighting the fact that the Government's budget planning was based on the central case, namely, that the UK would remain within the European Union, and it did not really account for the possibility of a no-deal, cliff-edge scenario. The question that we would have put to the Minister for Finance in this committee on several occasions was whether budget 2019 was sufficient to deal with a no-deal scenario, given that all the projections were based on there being a deal or an orderly exit. The response from the Minister has always been that the budget that was carried out for 2019 is fine, it is sufficient and there will be no need for a supplementary budget. Would the ESRI share the view of the Minister on that?

What impact will the Brexit process, whether it is a deal scenario or a no-deal scenario, have on budget 2020? That is the next budget and we will obviously be considering that post the summer recess.

On the three scenarios that the ESRI has looked at, did it analyse the impact of Brexit on the regions? My area is the north west, and my concern which is shared by many others in that region, is on the particular impact on tourism and agrifood, which are probably our two biggest economic drivers in that region.

In the ESRI's view, is the Government doing all that it can to prepare for Brexit? Is the ESRI satisfied that the financial planning being carried out by the Department is sufficient? Are we prepared as best we can be?

Dr. Bergin touched slightly on the one little positive from Brexit, namely, the potential increase in foreign direct investment, FDI. What are the ESRI's short-term projections for an increase in FDI? In the medium to long term, we might be looking at an increase when the UK has fully exited but in the short term, does the ESRI see that as being part of the buffer that might protect the country and offset some of the damage across other sectors?

Dr. Kieran McQuinn

I thank the Deputy for the questions. They are greatly relevant. On the 2019 budget, it is interesting that the Deputy would ask that question because we release a commentary just before each budget and we are obviously thinking about the kind of stance that we would suggest and recommend to Government. If the Deputy recalls, in the autumn of last year there were some calls among commentators, which were perfectly legitimate in many respects, for a contractionary budget. The feeling was that the economy was overheating and that a lot of pressure was growing in the economy etc.

Our reflection on that at the time was that it was still optimal for the Government to pursue what we called a neutral policy. This was basically a policy that would neither stimulate the economy nor be contractionary. We offered two reasons for that. One was that we took the view there was a real danger of a no-deal Brexit outcome and that the economy would be hit by a substantial economic shock as a result. Moreover, we took the view that if we were to implement a contractionary budgetary policy at the same time we would effectively be compounding the adverse shock that would result. The other reason was that there was still a need to continue investment in key resources, especially in the housing area, for example. That is what we suggested.

In broad terms most commentators would probably have taken the view that the 2019 budget was not neutral and that if anything, it was slightly on the stimulatory side. Overall, the implications for the public finances that Dr. Bergin outlined under an adverse case clearly show a significant potential increase in the deficit. That is obviously something that one would be slightly concerned about. In particular, we should be mindful of the fact that the budgetary position last year was somewhat massaged by bumper corporation tax receipts. As committee members probably know, corporation tax receipts went up by over 20% last year even though the Department of Finance only expected them to increase by 4%. The headline position or surplus recorded last year was not truly reflective of the underlying position. That is reflected in our forecast for this year and next year. We believe there will be a return to the deficit.

The bottom line is that while there is a deterioration under the adverse case, I still reckon it is within the broad budgetary parameters. Personally, I do not believe there is a need at this stage for a supplementary budget. I believe there is a case for the Government to pursue, at the least, a neutral policy. I would not say it should be explicitly counter-cyclical in terms of increasing expenditure to offset the impact but I would not go to the other extreme either, which would be to suggest that we should have implemented a contractionary policy to offset overheating pressures. In broad terms, I do not really think we need a supplementary budget, even under these circumstances. Obviously, we need to keep an eye on the situation. In particular, we need to keep an eye on the revenue side and what happens to key taxation aggregates like corporation tax, which recorded substantial increases last year.

Reference was made to the regional aspect. Dr. Bergin should feel free to come in on this point. I was not directly involved in the work Dr. Bergin did but it was beneficial in several respects because it used the standard tools we use in the institute, including the big macro model that can feed in many of the outside shocks that will come about due to Brexit. It also leveraged off the micro work we have been doing in the institute. My colleague, Dr. Martina Lawless, has done a good deal of micro-level work looking at sectoral issues. In fact she has published several papers on the issue. Her analysis has emphasised the regional dimension to the issue. In particular, she has looked at the sectors that would be most impacted. As we all know at this stage, agriculture and the related food processing sector, as well as tourism, are the sectors that could be particularly impacted. Obviously these sectors have a specific regional imprint. One interesting aspect of her work was that from a regional perspective, we all think of the Border area as being an area that clearly would be particularly impacted. Her analysis also suggested, however, that certain parts of Munster that are heavily reliant on agricultural income as a main source of income could be particularly impacted as well. We could have potentially a broad spread in terms of the impact.

We have done a good deal of work in looking at Brexit and the housing market. We see a broad regional spread in terms of the implications. Clearly for areas outside Dublin, and to a lesser extent outside Cork and Limerick, adverse implications arise for the housing market. In Dublin we can see an increase in demand for housing if we have large numbers of people coming to work. As I said, we have done a good deal of work looking at the regional aspects. Certainly, these are things of which we were mindful in the analysis we have conducted.

Dr. Adele Bergin

Deputy Lisa Chambers asked several other questions. She asked how prepared we are for Brexit. To be honest, that is a really tough question to answer. The Government has released various documents on its planning and there has been a widespread information campaign but we do not really know exactly what is going on behind the scenes. It is incredibly challenging for firms and for everyone in general to prepare for something when we do not know what kind of Brexit we will have. As of right now, we cannot even tell people when exactly it will happen. Even if six months ago we had known it was to be the bad case of a no-deal scenario we could have intensified planning during the subsequent six months. Really, the only thing that firms, the Government and everyone can do is to plan for the worst but hope for the best. I hope that answers the question.

Deputy Lisa Chambers asked about foreign direct investment. Under our deal scenario, we assume that the positive impact from foreign direct investment would begin at the end of the transition period, which is not until the end of 2020. In the two no-deal scenarios, we envisage the impact beginning straight away. Again, it is important to state that the overall negative coming from the trade shock far outweighs any positive on the foreign direct investment side.

The highlight we took from Dr. Bergin's presentation is the fact that there will be a severe impact on households. In employment terms and in terms of higher prices and so on across the board, households will really struggle. Does that make the case that we possibly need the support of the European Union and that we should look for more significant social transfers and other supports to try to help families? Obviously households, especially those where no one is working, will be in the most vulnerable situation. That is the first point.

Are the ESRI representatives being too sanguine about all of this? As we seem to get closer to Brexit - we could still be talking about Friday - the forecasts seem to be getting scarier. Does the ESRI COSMO model include different inputs as we get closer? For example, we all noted the possibility of the euro and sterling moving to parity and the impact that would have on tourism and our agriculture industry. Is it the case that as we get closer and begin to realise the profound implications, especially if we do not get the supports we need from the European Union, that things are getting more uncertain? Is it possible to input those issues into the model the ESRI is using?

The ESRI representatives said there are no comparable models. If we go back a little further are there not models? I am unsure whether any research has been done. It may be more a matter for our historian colleagues rather than the economists. What about when we left the British Empire? What about where states have severed, for example, the Czechs and the Slovaks? Is there anything in the literature about that or about where a state left a trading bloc and what the implications were?

Dr. Kieran McQuinn

Deputy Broughan asked about households. I will refer back to some previous work done by my colleague, Dr. Martina Lawless. She looked at the impact on household expenditure and household budgets. She examined the likely increase in prices households would face. Again, quite detailed work was carried out to look at the impact. It is significant if we look at the overall impact. She referenced a range of potentially €900 to €1,400 being added to the typical budget because of higher import prices. She looked at the various sectors of the economy that were likely to have World Trade Organisation tariffs applied and then at the knock-on impacts on the average household spend domestically as a result. Those are substantial increases.

Many of those increases tend to hit families at the lower end of the distribution because of their disproportionate reliance on products that potentially will have tariffs applied to them. There is no doubt they can be quite significant at a micro level in terms of the household implications.

On the issue of obtaining additional transfers from Europe, the only point I would make is that we could be victims of our own success if the performance of the Irish economy over the past four to five years is looked at. The fact is we have had very substantial growth rates, albeit from a low base and after the financial crisis. From a negotiating point of view one could see a difficulty in convincing European partners that we need to get additional social transfers when our economy has been growing at between three and five times the rate of the average European economy over the period. That certainly could be an issue. Obviously, if we reach a situation where we have a very dramatic impact on households, maybe that could be looked at.

In terms of being sanguine about all of this, there is always a danger with models. There are limitations to them. In particular in the context of the present study, it is very difficult to get a handle on a country in a relatively unprecedented situation of removing itself from a trading union, as is the proposed case. Dr. Bergin can talk about this herself but she and her colleagues have done a lot of stress testing of the model to see, for instance, what kind of trade effect there would need to be to have an impact on headline GDP such as we saw after the financial crisis. There would need to be a massive trade impact for the economy to collapse pretty much in the way it did in the period of 2008 to 2009 when the credit bubble collapsed. I take the Deputy's point that there is always a danger we can be a bit sanguine about this, but there has been a fair amount of stress testing and analysis done to underpin the analysis.

Dr. Adele Bergin

I might add to what Dr. McQuinn has said. In this paper we focus on the main channels through which Brexit will impact on Ireland, such as through lower trade and a small positive from foreign direct investment, FDI. On some of the other factors, which the Deputy mentioned, such as exchange rates, we do factor in significant depreciation for sterling. In our disorderly scenario, sterling could be around 95p in the short run in 2019-2020, but that could involve sterling going to parity for a short period.

In the paper, we have looked at the generally accepted channels through which Brexit will impact on Ireland, and there is some consensus around that. The other thing we did that is quite important is we drew on a lot of other evidence, particularly, as Dr. McQuinn has mentioned, a lot of other microeconomic evidence to try to get a handle on whether it could be higher or lower, to make sure that we were using the best possible evidence, and we used that then to generate our scenarios. It is our considered view of the most likely impact of Brexit on Ireland. As both Dr. McQuinn and myself have pointed out, there is a lot of uncertainty around these estimates. We simply do not have prior good examples. There have been examples of countries breaking up, but there are no recent example of countries leaving such a deep and closely integrated bloc like the EU that we have been able to draw on. There is arguably even more uncertainty around the short run estimates. Again, because we just do not know, there is no consensus on whether any adjustment would be more sudden or gradual in the new relationship between the UK and the EU. One of the reasons, in addition to all of that uncertainty, some of the short-term forecasts are being revised downwards is because we seem to be in this wait-and-see period. Firms, potentially, are delaying investment decisions and so on because they are waiting to see what the outcome of this could be.

Dr. Kieran McQuinn

We see that in the consumer sentiment indicator that we do and have done for quite a good few years, where the downturn in consumer sentiment since October-November of last year is quite significant. We have not done enough empirical analysis yet but the decline in consumer sentiment domestically seems very much to be almost directly linked to when there was heightened reference to no deal as far as this issue is concerned. If consumer sentiment is trending downwards to the extent that it is, that almost inevitably has a knock-on impact on consumption. Brexit is already impacting on the domestic economy.

How granular is the analysis of the various impacts, primarily negative, as the witnesses have described, but also the potential positives in terms of different sectors? Deputy Chambers asked about different regions. How would different sectors be impacted, negatively or positively?

Without in any way underestimating the difficulties all of this poses, and I imagine that the sectors that have been mentioned, agrifood and tourism, are likely to take a particular hit, if sterling falls, obviously that makes our exports to Britain more expensive and is likely to hit such exports. To what extent may that be mitigated by cheaper imports of certain things and potential boosts in terms of the costs of production for certain industries that rely heavily on British imports? Has that been factored in, or the balance of certain things becoming more expensive but other things becoming cheaper, even household goods? I believe we import around the same amount of food and drink as we export to Britain. The delegation can probably tell me more about that. Is that factored in when trying to work out what the impact might be of the costs of things and how that might impact on households, employment and the costs of production for industry?

Dr. Kieran McQuinn

My colleague, Dr. Bergin, will take the sterling issue. To give a very brief overview, the way that we have looked at Brexit over recent years is to take initially the large-scale macro model that is very highly aggregated. Then there have been a series of micro level analyses produced using more micro level data, drilling down into the sectoral issues, the issues the Deputy is talking about, the sectors of the economy that would be most impacted in terms of imports, exports, the potential for World Trade Organization, WTO, tariffs being applied to specific sectors in the UK economy, and the resulting impact on imports and exports in an Irish context as a result of that. The other piece of work that I referred to by my colleague, Ms Martina Lawless, looked at detailed, standard, nationally representative household expenditure levels and the impact of Brexit on that, the impact of tariffs being applied to certain products, and the implications for household budgets as a result of that. In that, we can do the mean and the average but we can also look at the distributional effects in terms of which households are most impacted by that. We have had that analysis, and then in the recent analysis we have gone back to the large-scale macro models so we can factor in the trade issues between the UK and Ireland, the UK and Europe and Europe and Ireland, etc., while also aggregating up from some of the micro level work. That is feeding into the current analysis in a number of different ways As to the Deputy's question about how granular the analysis is, this analysis has fed off a lot of very granular pieces of work that have been done using firm level data and household level data specifically to address the questions referred to.

Dr. Adele Bergin

As Dr. McQuinn has said, we are looking at the overall macro impact of this, but we are drawing from a lot of other research, and that other research is showing that it is particular sectors, like the agrifood sector and the indigenous SME sector, that will be especially affected, as well as certain regions.

The weakness of sterling makes our exports less competitive. At the same time, on imports, we have to take into account that there will be tariff and non-tariff measures taken which may lead to potential disruptions to the supply chain which is likely to outweigh anything on the exchange rate side. Many of our exporting SMEs are exporting primarily to the UK. The UK is also a really important source of intermediate goods used in the later stages of production. Any disruption to that supply chain is likely to mean costs that are much more substantial than the problems caused by currency fluctuation.

Dr. Kieran McQuinn

At an aggregate level, looking at the results it is clear that both exports and imports are significantly impacted. To a certain extent that can mitigate the overall impact on GDP. If the exports come down the GDP will be dragged down, but if imports go down it will keep the GDP reasonably high. There is an offset there, but it is more within the granular level in terms of sectors of the economy affected. As Dr. Bergin noted, most exporting SMEs trade with the UK. The agrifood sector, the food processing sector and the tourism sector will be affected but there are significant regional differences in terms of the reliance of the economy of those sectors. That is where the real story lies, in many ways.

Fáilte chuig an coiste. The ESRI's outlook is more modest compared with some other outlooks such as, for example, the Department of Finance and the Central Bank. Can the witnesses explain this to us? What, in their view, are the mitigating factors explaining the more modest assessment presented by the ESRI? Is it based solely the foreign direct investment, FDI, diversion, or are there other components that allow them to suggest a more modest outcome?

Dr. Adele Bergin

A series of studies have looked at the impact of Brexit on Ireland. They are all consistent in that they all find a significant negative impact for Ireland. Taking the disorderly no-deal scenario, the level of output is estimated to be around 5% lower that what it otherwise would have been in the long run. A study from the OECD last year has estimated the long-run impact in a disorderly scenario at around 2.5%. The Central Bank has estimated that output will be 6% lower in the long run. There are other estimates out there. We are somewhere within the range of estimates. I do not have the details of what exactly the Central Bank did, but I imagine it estimated a slightly more negative trade shock, which led to its finding of minus 6% in the long run compared with our estimate of minus 5%.

In terms of differences in the short-term implications for Brexit, Dr. McQuinn heads our short-term forecasting team in the quarterly economic commentary. Its most recent projections for 2019 to 2020 are, if Brexit does not happen, for a growth rate of 3.8% and 3.2% growth, but that falls to 1.2% and 2.4% in the event of a disorderly Brexit. The Central Bank's estimate for the two years is probably closer to 1%. It is quite consistent. There is more uncertainty around the impact we will feel in the short term, and an element of judgment is built into the forecast. I cannot speak for the Central Bank, but I suspect that it has forecast additional disruption.

There has been a long lead-in to Brexit and we are all aware of the machinations in Westminster and the news flowing out of various Council meetings. How likely is it that the markets have already priced this in and that the biggest disruption will be caused by a shock, an unprecedented or unexpected event? Given that there has been a long lead-in to a possible no-deal Brexit, is it possible that the shock has already been factored in? Is it a factor in the assessment provided by the witnesses?

Dr. Kieran McQuinn

That is always the case with financial markets. They are very attentive to that type of issue, and in fact build in risk in anticipation of events. In terms of the impacts on the real economy, I refer again to the points I made about things such as the consumer sentiment index and a related index on investment, the savings and investment index. Both of those indices, particularly the consumer sentiment index, have been trending down quite markedly since the midpoint of last year. Clearly the heightened references and the growing attention being paid to the possibility of a no-deal Brexit and its increased possibility certainly has had a negative and adverse impact already on consumption behaviour in the domestic economy and on investment decisions. Part of the issue in the case of the Irish economy is that because the economy has been growing so strongly over the past couple of years, we perhaps have not detected the impact Brexit has already had. I would argue that it is there already, and that its impact can already be felt.

Financial markets would be able to factor in the impact of a no-deal Brexit, so that would mitigate or restrict the possibility of a really sharp financial sector shock. However, the analysis shows that Brexit clearly will be felt most in the real economy.

Some of the headlines we have read have suggested that Brexit will create the biggest turmoil we will have experienced in our lifetime. That is not the case. This has been presented as being as big as the banking crash, but it does not fall into the ha'penny place when compared to what happened when previous Governments drove the economy off the cliff. I say that to put some context on Brexit as compared with the type of crash we experienced ten years ago.

One of the significant headline figures in the report was the impact this might have on potential job growth and job losses. It was suggested that there would be 80,000 fewer jobs in the economy if there was a no-deal Brexit. What factors led the witnesses to revise that figure upwards from 55,000 to 80,000? The previous estimate was 55,000, I believe.

There was discussion about the sectors, including the agrifood sector among others. I have not been able to get a copy of Edgar Morgenroth's report but I believe he has done some drilling down on the question of the impact on production and manufacturing jobs in particular regions. I note my native county of Donegal is already experiencing an impact on jobs as a result of Brexit. Contracts are being lost in my home parish and lay-offs are taking place. That is not isolated to one area but is happening across the board. In Killybegs the quota of fish has been caught and the factories are idle. People are being laid off because the companies are not sure whether they can catch the quota after Brexit. It is having a huge impact. Can the witnesses talk about the regional impact of Brexit in terms of jobs?

A no-deal scenario is expected to lead to higher prices for export goods, but also a higher cost in terms of production internally. Do the witnesses foresee a significant impact on inflation as a result of Brexit?

The ESRI forecasts a potential gain of €26 billion in foreign direct investment, FDI, and almost 8% of that overspill is as a result of Britain. Will the witnesses walk us through the type of FDI they expect? Are we seeing the signs of that spillover already flowing into Ireland? If that is the case, what is the scale of it?

Dr. Kieran McQuinn

Deputy Broughan asked whether we were being too sanguine about the impacts but we are concerned about the analysis. Brexit will affect the trade channel so, in the modelling exercise, we asked what trade shock would be needed to get to a collapse in the economy on the scale we saw after 2008. The answer is that it would need to be huge. Both exports and imports would be impacted so there would not be quite the same impact. If exports fall, GDP falls, but if imports also fall, GDP goes up. The 2008 crash was completely different because there was a massive credit bubble, and once that burst, there was an overwhelming collapse because the construction sector had seeped into all aspects of the economy. There was a collapse in GDP and in tax revenues etc. I do not think it will be like that but the credit collapse was over a relatively short time of between three or four years, while Brexit could impact the economy over a lifetime. There will be missed opportunities and the accumulated impact could be the same in the long run. There would be a more persistent loss to the economy over a longer period of time than the short sharp and really bad hit we took after 2008 or 2009.

Edgar Morgenroth and Martina Lawless did some work on regional issues. I agree that agriculture, agrifood, tourism and related sectors could be impacted, but the research pointed out that agriculture did not just impact the Border regions. The Munster area is very heavily reliant on agriculture, with a very strong dairy sector, while other parts of the country are very reliant on the beef sector and could also be heavily impacted by Brexit. There could be significant differences and Dublin may, on aggregate, do okay after Brexit, especially if FDI comes in and there is a lot of disruption to the financial sector in London leading to relocation to Dublin.

I saw graphs of the impact county by county and they showed an 8% reduction in manufacturing and production jobs in Donegal. Are they the figures? The Border belt was to be the region most impacted but many others were also seen to be affected.

Dr. Kieran McQuinn

The Border area is the one that will be most impacted but the analysis showed that agriculture and other sectors would be affected in other areas, where one would not necessarily expect there to be an effect.

Dr. Adele Bergin

The Deputy asked about the long-term impact on jobs and why the figures were different from our previous study. The last study we did was right after the UK referendum and, since then, there has been a huge amount of research on Brexit and we have drawn on that. We now have a better understanding of the way Brexit will impact the economy.

The Deputy also asked about FDI. Most of the work done on Brexit has been done in the UK and there is consensus in research circles in the UK that, as a result of Brexit, it will lose around one quarter of its FDI over the long term. In this paper we have tried to find out in what sectors the UK would be likely to lose investment. Ireland is already a very attractive destination for FDI, so if the UK experiences losses, it is a plausible assumption that Ireland will get some of it on the basis of its current share of FDI within the EU. The UK is expected to lose in the areas of computers, electronics, optical products, chemicals and pharmaceuticals, and these are some of the sectors in which we think Ireland could gain, along with the financial intermediation sector. The Deputy asked if there was any evidence of this so far. I am not aware of any but there have been reports that people have made applications in this regard, especially in the financial sector.

The all-island economy is now very significant. Did the ESRI have a look at the likely impact on Northern Ireland? I know the institute is not responsible for Northern Ireland but interactions among the Border counties, on both sides of the Border, are very intense. Will the witnesses cast any light on how bad the impact might be? A lot of business people in the North are very scared, as are the trade unions.

Many small firms appear to be completely at sea. My background is as an accountant and people are constantly asking me what I think they will have to do. I explain that, in a small agribusiness firm of between three and five people, there is likely to be an extra set of tax returns or the equivalent. In that context, I was a bit surprised at an answer I received from the Minister for Finance the week before last to the effect that there are only 210 Revenue staff in the southern Border counties who work as Customs and Excise or compliance people. We have heard repeatedly about the 400 to 600 people being recruited, but did anybody ask the ESRI to look at what Revenue is saying will happen? Nobody wants checks on the Border and they could perhaps be done some distance away. How will we actively get ready for Brexit and advise people what they have to do? The knowledge gap for small businesses close to the Border, on either side, is very intense.

There has been a very big fall-off in hotel bookings from Britain, particularly along the Border. Does the ESRI have any way of monitoring that? People are working very hard to make up for the lack of bookings by using other sources. Does the ESRI have any information or intelligence on this?

How low is sterling likely to go?

Newspapers such as the Financial Times have been constantly surprised that, perhaps because people have been stocking up on goods, the UK economy has not fallen that much. Have the witnesses looked at that and whether it will fall back if the deed actually happens? Of the alternatives to the withdrawal agreement, what would have the least impact on Ireland, for example, the combination of the Single Market, customs union and other things? We may have to find language, as has been done in many other agreements, that sets it out in a slightly different format.

Dr. Adele Bergin

Deputy Burton has asked a series of questions. I will begin and my colleague, Dr. McQuinn, might comment at various places. In terms of the best outcome for Ireland, it is that the UK would stay in the EU. After that, the next best outcome for Ireland is whatever keeps the United Kingdom as closely aligned as possible to the EU. The current withdrawal agreement does allow for a customs union and a free trade agreement as well. Whatever language is used, and I know different types of things have been proposed in the United Kingdom in recent weeks, the best one for Ireland is the one that keeps the UK as closely aligned as possible to the EU.

On the question of sterling, we have a figure for a depreciation in sterling of around 7% in the long run in our two no-deal scenarios and around half that rate in the deal scenario. That puts sterling in the worst case scenario at 95p to the euro, but in the very short run one could imagine that it could go to parity.

Most of the work on Brexit that refers to the UK does not really distinguish between Northern Ireland and so on-----

On that point, could I ask whether there is a separate statistical capacity in the North?

Dr. Adele Bergin

There certainly used to be. A colleague of mine was asking me about models for Northern Ireland and my answer to that was that I am not aware of one. I could be wrong in that. Most of the studies tend to report an aggregate impact for the UK.

Dr. Kieran McQuinn

I remember some time ago in a commentary reflecting the near dismay at the stance that certain parties in Northern Ireland were taking as far as this issue was concerned and saying that, of all the different regional economies on these islands, it was the economy in Northern Ireland that was most likely to be impacted in the most significant fashion as a result of Brexit. At least in our case, we were still going to be members of the European Union after all this settled down, whereas Northern Ireland, which has a very heavy reliance on agrifood, as we know, was facing not only all of the uncertainties that we were facing into but also being left in the situation potentially of not being a member of the European Union. We all know the substantial level of payments that come from the Common Agricultural Policy, and these are very important, particularly in rural areas. There is great uncertainty about what would happen to those kinds of payments if Northern Ireland, as well as the rest of the UK, were to leave the European Union. As an economy in its own terms, it would be especially impacted, even compared with ourselves.

Our former colleague, John FitzGerald, has done some work looking at the nature of the all Ireland economy, and I believe he gave a presentation on it before Christmas. He pointed to the fact that Northern Ireland's performance in general, not just in terms of Brexit and its impact, has not been exactly stellar in the past 20 years. He pointed out that despite the fact that there have been significant transfers under the Good Friday Agreement etc, there has not been a significant improvement in the underlying performance of the economy there. That also goes towards another point about the UK and the argument that the UK economy has not fallen that much. Looking at the underlying situation in the UK, however, it is quite worrying. They have had a productivity problem in the UK for some years that has predated Brexit, and all the signs are that Brexit, if it does go ahead, would only exacerbate those kinds of issues. We would be particularly concerned about the outcome of Brexit as far as Northern Ireland's economy is concerned and the knock-on effect on the overall economy of the island of Ireland because of the increasingly integrated nature across the Border. It is a real concern.

On some of the Deputy's more specific points, some of the most micro level information we have is the sentiment indicators that we talked about: the consumer sentiment indicators and the investment indicators. We do not have that level of granularity in terms of looking at individual sectors, such as hotel bookings and things like that. They all inevitably feed in to some of the sentiment indicators. As I said, certainly on the consumer sentiment but also on the investment sentiment, it is clear that there has been a downward trajectory in those indicators in the past six or seven months. In particular in the case of consumer sentiment, it is quite a sharp decline.

As there are no further Deputies offering, on behalf of the committee I thank the witnesses for their attendance here today. We very much appreciated the opportunity to go through the ESRI publication with them. Brexit is something that will be with us no doubt for a long time to come, regardless of the outcome of what happens in the next few days. I thank Dr. Adele Bergin and Dr. Kieran McQuinn very much.

The committee adjourned at 3.30 p.m. until 2.15 p.m. on Thursday, 18 April 2019.