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18 April 2016

How Brexit Could Affect Your Business

Posted By: AIB Business
Brexit-Image-245

The UK Government has set 23rd June 2016 as the date for its “In-Out” referendum vote on Britain’s continued membership of the EU. Opinion polls are pointing to a very close outcome, and an “Out” result would undoubtedly change the landscape for business owners in Ireland, writes Oliver Mangan, Chief Economist at AIB.

The UK EU referendum issue has now moved centre stage in the UK. We view it as the primary event risk for the UK and Ireland in 2016, as a vote to leave the EU would have profound economic and political consequences for both countries. It is now a 50/50 call, in our view, on whether the UK votes to leave or remain in the EU.

Impact on the UK Economy – Uncertainty About Trade Agreements

Most studies show that leaving the EU would have a negative impact on the UK economy. It could take up to a decade for the full economic impact to be felt in terms of foreign direct investment (FDI), trade flows, migration etc. There would obviously be negative knock-on effects for Ireland given its close ties with the UK.

 

The critical question centres around what type of trade arrangements would be put in place between the UK and EU post a Brexit. The more the UK seeks to regain control over policy and regulations, the more difficult it will be for it to negotiate a worthwhile trade deal with the EU. In order to secure a preferential trade deal, the UK is likely to have to adhere to EU rules and regulations.
 

It would be a major drawback for the UK if it had to fall back on World Trade Organization (WTO) rules, which is likely to involve the imposition of trade tariffs. Some 45% of UK exports go to the EU, so it is a vital market. On the other hand, the UK takes just 10% of EU exports. Thus, the UK is not as vital to the EU for trade as the EU is to the UK.
 

Trade Impact on Ireland

Ireland has very close trade and economic links with the UK and so would be greatly impacted by Brexit. Those trading with the UK, at a minimum, would face increased administrative and regulatory costs and possibly tariffs. A recent ESRI report suggests that there could also be a significant decline in bilateral trade. Sectors such as agriculture, retailing, energy and financial services are likely to be most impacted by Brexit.
 

The main Irish exports to the UK are food, pharma, ICT and a broad range of services, while on the import side, energy, manufactured goods and services are all important. Ireland is the UK’s fifth largest export market. Some 33% of Ireland’s imported goods come from the UK. It is worth noting that more goods are imported into Ireland from the UK than the rest of the EU combined. 
 

Northern Ireland Border Issues

The border with Northern Ireland would become an external EU land border post Brexit. This could give rise to all sorts of issues in terms of customs posts, passport controls etc, depending on the extent to which Brexit impacted the movement of goods, services and people between the UK and EU.
 

Cross-country Investment between Ireland and the UK

There is substantial cross-country investment between Ireland and the UK. UK companies have a particularly large presence in Ireland, most notably in retailing and financial services. Britain is also Ireland’s most important market for tourism, while the UK is the most visited destination for Irish people travelling abroad.
 

Implications for Retail and Agri Sectors

Brexit could pose major problems for large retailers and other companies that treat Ireland and the UK as one market for goods distribution, sales, accounts and business administration. Brexit would have serious implications for the Irish agri sector in particular, as the UK takes around 35% of Ireland’s food exports. The likely weakening of sterling as a result of Brexit would also negatively impact our competitiveness vis-à-vis the UK.  
 

Potential FDI Benefits

One area in which Ireland could benefit from Brexit is foreign direct investment, as it would be the only English speaking country left in the EU that could act as a gateway to the Single European Market. The UK would become much less attractive to foreign direct investment that required access to EU markets. Ireland could attract some firms, most notably in the financial services sector, that are located in the UK but need to maintain a presence in the EU or access to EU markets. However, this is a double-edged sword as some Irish firms could be tempted to relocate part of their operations to the UK, if it is their main market.
 

Obvious Sterling Risk

Brexit is a major event risk for sterling. The euro has already risen by more than 10% against sterling since the start of December, climbing from 70p to above 78p. Meanwhile, GBP/USD has fallen from a high of $1.59 last summer, to around $1.40 recently.  
 

Should the UK vote to remain in the EU, we would expect sterling to recover some lost ground, rising back up to 74-75p vs. the euro, with GBP/USD climbing towards the $1.50 level. This rise in sterling would benefit Irish exporters to the UK. We don’t see sterling moving back up to last year’s highs of around 70p versus the euro and $1.59 against the dollar, as markets are no longer expecting the Bank of England to raise rates anytime soon.
 

Sterling can be expected to see further sharp loses in the event of a vote for Brexit. This will lead to cheaper imports from the UK but hit Irish exports to that market. At a minimum, the euro is likely to rise to its 2013 range of 85-86p but it could easily climb to its 2011 high of 90p on a messy Brexit, where relations are soured with the EU and there are a lot of difficulties in reaching some form of a trade deal. The euro is also likely to lose ground, as a Brexit would be seen as a severe blow to the EU. EUR/USD could fall to last year’s low of $1.05. GBP/USD is likely to breach 30 year lows, falling to around $1.25 and possibly going as low as $1.15 on a messy Brexit.
 

                          Forex Forecasts for Various Brexit Outcomes

OUTCOME EUR/GBP EUR/USD GBP/USD
REMAIN IN EU 0.74 1.11 1.50
ORDERLY BREXIT 0.86 1.07 1.25
MESSY BREXIT 0.90 1.05 1.17

 

Written by: Oliver Mangan, Chief Economist, AIB
 

See also:

Please be aware that all of the views expressed in this Blog are purely the personal views of the authors and commentators (including those working for AIB as members of the AIB website team or in any other capacity) and are based on their personal experiences and knowledge at the time of writing.

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Allied Irish Banks, p.l.c. is regulated by the Central Bank of Ireland. Copyright Allied Irish Banks, p.l.c. 1995.

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