Ireland's economy is better able to deal with a slump in sterling than it has been in the past, the Central Bank has said, as the euro hovers at a five-year high against the British currency as a result of the UK Brexit vote.
The euro has surged by more than 14 per cent since the UK referendum on June 23rd to more than 88p and some, including analysts in Investec and UBS, see the exchange rate reaching 90p by the end of the year.
The Central Bank’s latest economic forecasts, published on Thursday, which see Irish gross domestic product expanding by 4.5 per cent this year and 3.6 per cent in 2017, is based on a euro-sterling rate of 84p, said John Flynn, the head of Irish economic analysis at the bank.
Mr Flynn said that if the current rate persisted it would have some impact on future forecasts.
However, he added: “We’ve seen over a long period of time the economy demonstrate considerable flexibility and it’s able to deal with the sterling rate at quite different levels. The Irish economy is a much more flexible economy now than it was at various times in the past, when sterling was a challenge for us.”
Demand
The Central Bank maintains that demand for products and services in trading-partner countries outweighs everything, including foreign-exchange rates. While recent UK economic data suggested the British economy was faring better than many had feared following the Brexit vote, the Central Bank’s chief economist, Gabriel Fagan, said it was “far too early” to determine the real impact of the decision on the world’s fifth largest economy.
Meanwhile, Mr Flynn noted that the euro-sterling rate was much more important to companies in the food, clothing and footwear sectors, as well as tourism, than elsewhere in the economy.
“And the exchange rate is generally more important for indigenous firms because the UK accounts for a greater share of export markets for those groups,” he said.
The comments follow the Central Bank’s publication of its latest quarterly bulletin in which it shaved its forecasts for personal consumption, exports and overall economic growth for this year and warned risks to these projections “remain clearly tilted to the downside” as a result of Brexit.
The organisation lowered its forecast for gross domestic product growth for this year by 0.4 percentage points to 4.5 per cent and left its 2017 projection unchanged at 3.6 per cent, having downgraded its estimates more materially in July in the wake of the surprise Brexit vote.
Mixed signals
“Signals in relation to consumer spending have become more mixed, although the balance of evidence across a range of indicators points to only a marginal slowdown, with consumer spending supported by solid gains in employment and rising earnings,” the Central Bank said.
The Central Bank lowered its forecast for personal spending growth, which rebounded two years ago following years as consumers showed the first signs of recovery from the financial crisis, to 3.8 per cent for this year from 4 per cent previously. Its 2017 forecast has come back to 2.2 per cent from 2.3 per cent.
It sees underlying domestic demand, a measure of the economy preferred by some analysts given how multinationals’ activities can skew the headline figures, slowing to 4 per cent this year from 5 per cent in 2015, before easing further to 2.7 per cent in 2017. It has raised its forecasts for the economic contribution from activity in aircraft leasing and multinationals moving intellectual property.
Export growth is likely to slow to 5.6 per cent this year from a previous projection of 6.4 per cent, before easing back to 4.4 per cent in 2017, according to the Central Bank.
With an eye on the unveiling of Budget 2017 next week, the Central Bank said “a prudent fiscal strategy remains essential, given the negative loops between fiscal stability, financial stability and macroeconomic stability.”
It also said the Government set long-term targets that were “robust to statistical issue”, clearly a reference to the 26 per cent GDP growth rate for 2015 that had little to do with the underlying economy.
Uncertainties
“While the uncertainties in relation to the measurement of economic growth make it more difficult to calculate the underlying path for tax revenues, it would be prudent to assume that some fraction of the recent surge in corporation tax revenues might be temporary in nature,” it said.
Corporation tax rose to €4.16 billion for the first nine months of the year from €3.9 billion for the same period in 2015, according to the latest exchequer return figures, published earlier this week.
