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Ireland faces ‘marked slowdown’ in Brexit fallout – Deutsche Bank

The UK’s vote to pull out of the European Union will result in a “marked slowdown” in Irish economic growth, Deutsche Bank has warned.

And it said there were “limits” to Dublin’s capacity to take on financial services firms from London that may be looking to shift some operations in the wake of the Brexit vote.
In a note to investors, Deutsche chief economist Mark Wall also warned that the referendum result could affect Ireland’s housing sector, claiming higher uncertainty and tighter conditions would likely weaken housing demand.

“There are analysts predicting outright recession in the UK. Ireland is exposed to these risks,” Deutsche said. “We expect Irish GDP growth to slow from 5pc this year to 2.9pc in 2017. This is a marked slowdown.”
Deutsche also referred to the revision of Ireland’s GDP rate last year from 7.8pc to an “eye catching” 26.3pc.

The surge was driven by the activities of Ireland’s multinational sector, and has been dismissed by economists as a “meaningless” gauge of what is happening in the Irish economy.
It argues that a truer reflection are tax revenues, retail sales and employment growth.

Mr Wall said that one could be forgiven for thinking that Ireland could “easily shrug off its exposure to the UK” by looking at the GDP data. “This is too optimistic a point of view, in our opinion,” Deutsche said.
Mr Wall described the GDP surge as “growth by acquisition”, and a kind of growth more commonly associated with companies rather than sovereigns.

“It points to significant weakness with GDP as a statistic to broadly represent an economy’s actual income on the one hand and as an official denominator within other policy relevant statistics on the other, like the fiscal deficit and public debt to GDP ratios,” he said.
“The problem cannot go unaddressed by the Commission and Eurostat.”

Deustche said a range of indicators suggest the domestic economy probably expanded by between 5pc and 6pc last year.
It warned that the Irish economy is exposed to Brexit through various channels, pointing out that about 40pc of exports from domestic firms go to the UK. These firms are responsible for more than 85pc of employment, the bank said.

“To the extent that a large negative shock to UK domestic demand hurts the Irish indigenous firms the most, the Irish employment base is significantly more exposed than the 14pc of exports implies.”
Brexit could threaten Ireland’s housing recovery.

The bank said housing demand could weaken further if Brexit threatens jobs, given that so many small firms in Ireland export to the UK. “Banks are likely to be even more cautious with their provision of mortgage finance and if incomes are under threat, the still elevated level of debt could suppress demand,” Mr Wall said. Dublin’s capacity to take advantage of the dislocation from London of financial services firms has “limits”.
Mr Wall said that if the common travel area between Ireland and the UK can be retained, then Ireland will be an appealing destination for firms relocating elements of their business from London. But infrastructural gaps could hinder Dublin’s ability to benefit, Deutsche suggests.

“A decision to relocate will depend on a range of factors. Commercially, the fit requires a range of other business services being available, from sufficiently well developed global accounting, tax, legal and business services industries.

“Non-commercially, it depends on factors such as availability of housing, school places, etc. Dublin’s non-commercial capacity and infrastructure is suffering from under-investment after the financial crisis.”
Deutsche also warned that political instability at home could also pose problems. And it said that an adverse finding from Europe in the Apple case “could affect attractiveness”.

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