Irish economy recovers from last year’s Brexit-vote shock, but worries remain

 Andrew Harker | Economics Associate Director, IHS Markit
Irish economy recovers from last year’s Brexit-vote shock, but worries remain

With the UK set to invoke Article 50 imminently, kick-starting the official process for leaving the EU, Irish companies will watch keenly the start of the negotiations for clues as to the future relationship with Ireland’s most important trading partner. Latest data from IHS Markit suggest that economic growth has been strong at the start of 2017 and business confidence robust, but worries about ‘Brexit’ dominate, particularly at manufacturers.

Business activity rises sharply in February

PMI data showed that the UK’s decision to leave the EU had a detrimental impact on Irish firms. Manufacturing output stagnated in the immediate aftermath of the vote, while growth of services activity eased markedly to reach a three-and-a-half year low in October.

However, the final months of 2016 and the start of 2017 have seen rates of expansion return to the strong levels seen prior to the UK’s referendum. New orders rose substantially in each of the manufacturing, services and construction sectors in February, with the rate of growth only fractionally down on January’s one-year high. This fed through to further increases in output across all of the three sectors, and encouraged firms to continue to take on extra staff.

PMI Output Indices for Ireland

Services expectations improve, but manufacturers less upbeat

Forward-looking survey data suggest Irish firms expect to weather the storms of political uncertainty in 2017. The Markit Business Outlook survey for February indicated improving confidence among private sector firms in Ireland. A net balance of +57% of companies, up from +51% in October, predict a rise in business activity, the highest reading for a year. Furthermore, Irish firms signal the strongest degree of optimism among all countries surveyed globally at the start of the year.

Business Outlook Activity net balances

Firms’ improved sentiment reflected forecasts of an improving domestic economy, expansion into new markets and the launch of new products. In fact, some firms went as far as to suggest that ‘Brexit’ could lead to business opportunities going forward as companies may look to move operations from the UK to Ireland.

That said, the uncertainty regarding the future trading and customs relationships between the EU and UK means that many more Irish companies see ‘Brexit’ as a threat going forward than an opportunity.

Threats to Business Activity

There are clear diverging trends in confidence between the manufacturing and services sectors. The improved outlook overall is largely reflective of increased sentiment among service providers, where the net balance has risen to +60% from +50% in October. On the other hand, sentiment at manufacturers is lower than seen in the final quarter of last year (50% from +53%), likely reflecting their greater exposure to uncertainty regarding trade arrangements.

Manufacturing investment sentiment falls

This divergence between the two sectors isn’t only apparent when looking at expectations around business activity. Manufacturers are also less bullish around investment decisions going forward, given current levels of uncertainty. Manufacturing sentiment regarding both employment and capital expenditure is at a four-year low, while a net balance of just +8% of manufacturers expect to raise R&D spending over the coming 12 months. Meanwhile, service providers are more upbeat regarding staffing levels and capex than they were in October.

Business Outlook Employment net balances

Other risks to the outlook commonly cited by firms include euro strength against sterling making exports less competitive in the UK, as well as wage inflation. In fact, cost pressures look set to build generally, with the input prices net balance up to +51%, the highest since the global financial crisis. Cost inflation expectations in Ireland are above the eurozone average and second only to the UK globally, with companies also predicting sharper rises in their output prices.

While current conditions are generally positive and the near-term future appears bright, the longer-term situation for Irish firms is extremely uncertain. Companies will therefore hope for constructive negotiations between the EU and UK once Article 50 is invoked. The next round of PMI releases completing the picture for the first quarter of 2017 will be available in early April.

Andrew Harker | Economics Associate Director, IHS Markit
Tel: +44 149 1461016
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