OLIVER MANGAN: Brexit is already weighing on UK economy as it approaches a fork on the road

While the Irish economy has continued to perform very strongly over the past couple of years, despite all the uncertainty surrounding Brexit, the same cannot be said of the UK economy.

In its latest quarterly update, the Economic and Social Research Institute puts the underlying growth rate of the Irish economy at between 4.5% and 5% for 2018, much the same as in the previous two years. Employment has continued to grow by around 3%.

Contrast this with the UK, where growth in GDP and employment have slowed appreciably in the past two years. The UK economy grew by just 1.3% last year and 1.7% in 2017. Ahead of the Brexit vote, the UK economy had been growing at close to 2.5%.

Meanwhile, employment growth has slowed from 2% to 1%.

Two Brexit-related factors, in particular, have caused the UK economy to slow. The spike in inflation, as a result of the sharp fall in sterling, following the vote for Brexit, saw a marked slowdown in consumer spending as real household incomes declined.

And the uncertainty around Brexit has led to a weakening in business investment and construction activity.

The UK economy finished 2018 on a soft footing. The Bank of England estimates the economy may have grown by just 0.2% in the final quarter of last year and says growth may remain at this level in the first quarter of 2019.

The outlook for the UK economy, over the next couple of years, will be shaped by how Brexit unfolds. The Bank of England estimates the economy could grow at a steady rate of 1.7% over the next three years, if there is a “relatively smooth” Brexit, which does not cause much disruption. The IMF is more cautious and forecasts growth of 1.5% over the next couple of years.

On the other hand, a hard Brexit would have negative consequences for the UK economy. GDP could be as much as 8% lower compared to a smooth Brexit or, indeed, a no-Brexit outcome.

Not surprisingly, the Bank of England is keeping UK monetary policy on hold, until there is some clarity on Brexit. If a no-deal materialises, it is likely the Bank of England would cut rates. The outlook for sterling appears equally binary. It can be expected to rally in the event of a soft or delayed Brexit, but fall sharply in the event of a no-deal hard Brexit. The outlook for the UK economy and currency has seldom been so unclear.

Oliver Mangan is chief economist at AIB


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