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Ireland's economy buoyant but Brexit remains a threat

Moody's forecasts GDP growth of 4 per cent in 2019 and 3 per cent in 2020

Man and woman talking in an alleyway in Dublin, Ireland. Moody's Investors Service is forecasting GDP growth of 4 per cent for Ireland in 2019. Getty Images
Man and woman talking in an alleyway in Dublin, Ireland. Moody's Investors Service is forecasting GDP growth of 4 per cent for Ireland in 2019. Getty Images

Ireland's economic prospects remain bright as a result of "substantial competitiveness gains" made by its economy, but the country faces a significant external threat in the form of Brexit, a new note by Moody's Investors Service said.

In its annual credit analysis, the ratings agency maintained its A2 stable rating on the country.

"Ireland's economic prospects are strong on account of substantial competitiveness gains, as well as robust export and productivity growth, which in turn is linked to the expanding presence of multinational corporations," said Sarah Carlson, senior vice-president at Moody's. "Public finances have improved rapidly alongside the economic recovery, the private sector has also reduced its debt levels, and the banking sector is no longer a large contingent liability for the government."

Ireland's exports of goods and services stand at 122 per cent of its nominal GDP, Moody's said, driven by technology companies and pharmaceutical/medical products companies. Between them, these sectors make up 40 per cent of Ireland's gross value-added. The construction sector, which was responsible for generating 10.6 per cent of gross value added before the last financial crisis in 2006, now contributes just 2.8 per cent.

Many foreign firms have set up operations in Ireland, attracted by the country's low corporate tax rate of 12.5 per cent, and its highly skilled, English-speaking workforce. The country also introduced a lower tax rate of 6.25 per cent for any income arising from intellectual property, which has encouraged firms to register patents in the country.

Moody's is forecasting real GDP growth of 4 per cent for Ireland this year, dropping to 3 per cent next year, driven by higher private consumption and a recovering housing market.

However, Ireland's openness to international investors mean the country has "an unusually high degree of economic volatility", which, according to Moody's, means the country "requires larger fiscal buffers to deal with negative shocks".

The biggest looming threat is Brexit - not only because the UK buys 11 per cent of Ireland's total exports, but also because supply chains are "deeply integrated". Moody's cited an estimate from the Economic and Social Research Institute that Ireland's GDP could be 5 per cent lower over a 10-year period if a no-deal Brexit took place than it would be if the UK remained in the EU.

In a note published earlier this year, London-based Capital Economics said that if the UK left the European Union without a deal and imposed WTO tariffs on all of its exports, "we estimate that tariffs and currency movements would raise the cost of Irish goods in the UK by about 25 per cent, and that the resulting reduction in demand would knock about 1.5 per cent off Ireland’s GDP".

It added that there would also be a hit to Ireland's economy from non-tariff barriers, as goods would be delayed subject to checks on products to ensure they comply with EU rules.

"Given that about half of Ireland’s exports to countries other than the UK pass through the UK before reaching their final destination, delays at the borders could be very costly," Capital Economics said.

When this and other factors such as a short-term decline in investment are factored in, Brexit could "knock a total of 2 per cent off Ireland’s GDP, spread over 2019 and 2020", the firm added.

Updated: August 15, 2019 01:34 PM



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