The Economic Outlook as Brexit Deadline Approaches · Rates have been cut in US, Australia, New Zealand, India in recent months ... as well as tariffs in assessing impact of Brexit

The Economic Outlook as Brexit Deadline Approaches

9th October 2019

Gavin O’CarrollHead of Business & Retail Treasury Sales - Ireland

Global data generally weaker than expected this year

U S E c o n o m i c S u r p r i s e I n d e x

O N D J F M A M J J A S- 8 0

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S o u r c e : T h o m s o n R e u te r s D a ta s tr e a m

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S o u r c e : T h o m s o n R e u te r s D a ta s tr e a m

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S o u r c e : T h o m s o n R e u te r s D a ta s tr e a m

E m e r g i n g M a r k e t s E c o n o m i c S u r p r i s e I n d e x

O N D J F M A M J J A S- 4 0

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S o u r c e : T h o m s o n R e u te r s D a ta s tr e a m

Weakening manufacturing amid slowing global trade

48

50

52

54

56

58

Global PMIs

Manufacturing Services Source: JP Morgan via Refinitiv

Growth in W orld Trade (3 MMA) YoY %

2012 2013 2014 2015 2016 2017 2018

-1

0

1

2

3

4

5

6

World Trade - Netherlands Bureau for Economic Policy Analysis

Source: Thomson Reuters Datastream

Global growth forecasts cut for 2019 to 2.9% from near 4% a year ago

Weak manufacturing activity in particular, as global trade slows

Risks remain to the downside – trade wars, slowdown in China, uncertainty

Loose monetary policies, more expansionary fiscal policies and rising real

incomes are helping to support activity

Inflation remains subdued, despite some pick-up in wage growth

Global growth forecasts cut for 2019-20

GDP (Vol % Change) 2017 2018 2019(f) 2020(f)

World 3.8 3.6 2.9 3.0

US 2.2 2.9 2.4 2.0

Euro Area 2.4 1.9 1.1 1.0

UK 1.8 1.4 1.0 0.9

Japan 1.9 0.8 1.0 0.6

Source: OECD Interim Economic Outlook, September 2019

Central banks start to loosen policy again

Central banks concerns; slowing economies, low inflation, risks to global growth

May feel they need to act early as don’t have much ammunition

Rates have been cut in US, Australia, New Zealand, India in recent months

ECB eased policy last month – moved rates deeper into negative territory, restarting QE

1.00

1.40

1.80

2.20

2.60

3.00

3.40

Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Mar-21 Jun-21 Sep-21 Dec-21

US 3 Month Eurodollar Futures

Latest : 02-Oct-2019 As of: 28-Sep-2018

%

Source : Refinitiv -0.60

-0.40

-0.20

0.00

0.20

0.40

0.60

0.80

Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Mar-21 Jun-21 Sep-21 Dec-21

3 Month Euribor Futures

Latest : 02-Oct-2019 As of: 28-Sep-2018

%

Source : Refinitiv

Growth is easing from high level, with some data softening

40

60

80

100

120

Aug-12 Aug-13 Aug-14 Aug-15 Aug-16 Aug-17 Aug-18 Aug-19

Consumer Confidence (ESRI - KBC)

Source: Refinitiv

0

1

2

3

4

5

6

7

8

Q2 2013 Q2 2014 Q2 2015 Q2 2016 Q2 2017 Q2 2018 Q2 2019

Retail Sales (ex-autos) - Volume, YoY, %

Source: Thomson Datastream

%

45

50

55

60

65

Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Sep-18 Sep-19

AIB Irish Mfg and Services PMIs

Source: Refinitiv

Services

Manufacturing

-8

-6

-4

-2

0

2

4

6

8

Q2 2012 Q2 2013 Q2 2014 Q2 2015 Q2 2016 Q2 2017 Q2 2018 Q2 2019

Employment (YoY, %)

Public

Private

Total

Source: CSO via Refinitiv

%

Good Irish growth can continue if external risks avoided

Irish economy should continue to grow at impressive

pace, but not as strongly as in recent years

Construction picking up from still low output levels

Public spending on the rise

Activity supported by low interest rate environment

Good growth in household incomes

Continuing strong inflows of FDI

Irish inflation still very low

However, Brexit is a real challenge for the economy

Important also that global economy avoids downturn

GDP growth forecast at 5.0% for 2019 and 3.25% in

2020, assuming hard Brexit/global downturn avoided

ESRI estimates medium-term growth rate of

economy at around 3.25% in the period 2020-2025

0

5,000

10,000

15,000

20,000

25,000

30,000

2011 2012 2013 2014 2015 2016 2017 2018 2019(f) 2020(f) 2021(f)

CSO Housing Completions

Source: CSO, AIB ERU

0

4

8

12

16

20

Q2 2013 Q2 2014 Q2 2015 Q2 2016 Q2 2017 Q2 2018 Q2 2019

Irish Exports of Services(Volume, 3 Qtr Moving Average, YoY% Change)

Source : CSO

Still much uncertainty about Brexit

March exit date deferred as UK Parliament was unable to support Withdrawal Agreement

EU granted an extension to Article 50 up to end October

New PM Johnson vowed the UK would leave EU by end October, with or without a deal

Parliament against leaving the EU without a deal

It passes legislation to seek a further extension to Article 50, if deal not done

UK government against another Article 50 extension, but hard to avoid if deal not done

UK have produced alternative ‘backstop’ proposals, though unlikely to be accepted by EU

Difficult to get a deal done by mid-October EU summit. Article 50 extension seems likely

General election on the cards, likely in late November

Risk of no-deal hard Brexit will increase if Conservatives win general election

But election could also result in another hung Parliament, still deadlocked over Brexit

Brexit expected to lower growth rate of Irish economy

ESRI estimate that Irish output would be reduced over time by 2.6% under a ‘deal’

scenario in the long run (i.e. after 10 years). Unemployment rate is 1% higher

Multiple hits to the Irish economy from a no-deal Brexit: further collapse in sterling,

recession in UK, disruption to trade/supply lines, tariffs, new adm and regulatory costs

Sharp fall-off in trade with UK likely on a no-deal Brexit, with this shock front loaded -

around half of the impact on trade would take place in the first two years, per ESRI

In a ‘disorderly no deal’ scenario, ESRI estimates that GDP would be 5% lower after

10 years Unemployment rate would be 2 percentage points higher

Central Bank say a disorderly hard Brexit could reduce Irish growth by 4% in first year

and 6% in long run

Copenhagen Economics Report considered costs of regulatory divergence for goods

and services and of border checks, as well as tariffs in assessing impact of Brexit

Estimates impact by 2030 is to reduce Irish GDP by 2.8% under a soft Brexit (EEA),

4.3% in a FTA and 7% in a no-deal, hard Brexit WTO scenario

Agri. sector would be severely impacted by hard Brexit

Main EU tariffs relate to food products, keeping prices high. UK may also impose tariffs on all food imports post Brexit

Food and Beverages account for 25% of total Irish exports to UK

Around 40% of Irish food exports go to the UK – key market for beef and cheese

Other sectors very dependent on UK market include machinery and transport, metal products, textiles

Some 40% of indigenous Irish exports go to UK compared to 10% for foreign owned companies

0%

%5

%10

%15

%20

%25

%30

35%

40%

%45

50%

Share of Exports by Industry Destined for the UK (ESRI)

A total of 700 SME’s (with up to 250 employees) across the island of Ireland

AIB Brexit Sentiment Index – Q2 2019

Headline index remained depressed in Q2. Number of firms reporting that Brexit is having a negative impact on their businesses increased in both ROI and NI

SMEs also remain concerned about Brexit’s impact in the future, both on their own business & the wider economy

Manufacturing, Food & Drink, Tourism and Retail sectors most concerned about Brexit

40% of RoI and 38% of NI firms who had investment plans say they have been cancelled or postponed owing to Brexit.

Government bases Budget 2020 on no-deal Brexit

Government brings forward cautious Budget for 2020 based on no-deal Brexit

GDP growth forecast to slow to 0.7%, with no growth in GNP

Additional spending increases announced in Budget

Government provides for a €650m Brexit contingency fund to assist sectors that would be

hardest hit by a no deal Brexit - the Agri-Food, Enterprise and Tourism

Some €450m in tax hikes – carbon (€90m), Commercial stamp duty (€141m), Dividend

Withholding tax (€80m), Tabacco Excise (€57m) and Corporation tax on REITs/IREFs (€80m)

Budget to move back into €2bn deficit next year from a projected surplus of €600m in 2019

Overall, quite significant tax hikes in budget, with virtually no change in personal taxes

Current spending to rise by 3.5% in 2020, with capital spending up by 10%

Public finances expected to remain on a solid footing. Won’t be derailed by Brexit

Dollar holding upper hand, Brexit impacting sterling

Relative strength of US economy, wide interest rate differentials and geopolitical uncertainties

ddprovide support for dollar this year

Euro moves down to below $1.10 as ECB moves back onto policy easing path

Sterling volatile - weakened over summer on increased risk of no-deal Brexit

UK currency recovers ground in past month on growing hopes for a Brexit deal

0.84

0.86

0.88

0.90

0.92

0.94

Oct-17 Apr-18 Oct-18 Apr-19 Oct-19

Source: Refinitiv

Euro / Sterling Exchange Rate£

1.05

1.10

1.15

1.20

1.25

1.30

Oct-17 Apr-18 Oct-18 Apr-19 Oct-19

Euro / Dollar Exchange RateUS$

Source: Refinitiv

FX Market Outlook: Big sterling move possible

0.95

1.05

1.15

1.25

1.35

1.45

1.55

Oct-09 Oct-11 Oct-13 Oct-15 Oct-17 Oct-19

Euro / Dollar Exchange Rate

Source: Refinitiv

US $

0.65

0.75

0.85

0.95

Oct-09 Oct-11 Oct-13 Oct-15 Oct-17 Oct-19

Euro / Sterling Exchange Rate

Source: Refinitiv

£

Brexit - key factor influencing sterling in period ahead

If ‘soft’ Brexit looks on the cards, EUR/GBP could move down to 85-86p

If ‘hard’ Brexit becomes very likely, EUR/GBP could move above 93-95p and rise to parity

Dollar looks well underpinned near term, but US imbalances a long term worry

Expect EUR/USD to trade in a $1.08-1.12 for remainder of 2019

Note: All Irish data in tables are sourced from the CSO unless otherwise stated. Non-Irish data are from the IMF, OECD

and Thomson Financial. Irish forecasts are from AIB Economic Research Unit. This presentation is for information

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of opinions are subject to change without notice. This presentation is not to be reproduced in whole or in part without prior

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