The period of robust economic growth has continued this year. GDP growth of 6 ½ per cent in the first half of the year and the relatively low rate of unemployment which stands at just over 5 per cent support this assessment. However it is also clear that there are dark clouds on the horizon, with the external environment continuing to deteriorate, and the risk of an adverse shock to the economy - for instance through a disorderly Brexit – rising all the time.
The macroeconomic projections published at Stability Programme Update (SPU) 2019 were based on the assumption the UK will leave the EU with a deal and that a transition ‘status quo’ period would be agreed that extends or replicates existing frameworks until end-2020. However, since the publication of SPU the possibility that the UK will leave the EU without a deal has increased substantially. To reflect this, for budgetary purposes, the Government has decided to base Budget 2020 on the assumption of a 'no-deal' Brexit.
In order to quantify the effects of a disorderly Brexit, my Department and the Economic and Social Research Institute (ESRI) recently published an updated model-based assessment of the economic impacts. The report found that in aggregate terms compared to a scenario in which the UK did not leave the EU the level of GDP would be 3 per cent lower after 5 years. The impact is expected to be greatest in the first year which is primarily explained by higher trade costs with the UK reducing the level of overall trade and short run disruption due to uncertainty.
Despite these impacts, the Irish economy is still expected to grow but at a slower pace as a consequence of Brexit. As part of Budget 2020 my Department will publish updated macroeconomic forecasts which will be based on the assumption that the UK leaves the EU without a deal.
Of course Brexit isn’t the only risk faced by the economy. As a small open economy Ireland is particularly exposed to a slowdown in growth in key export markets, with a loss of momentum particularly evident in both the euro area and the UK in recent quarters.
The best way we can mitigate against these risks is through prudent budgetary policy, careful management of the public finances and by focusing on competitiveness-oriented policies.