So, the UK has voted to leave the EU. But what does that actually mean? For now, it means no change, as David Cameron signalled today that his successor decides whether to trigger Article 50 of the Lisbon Treaty. Only when this happens does the clock start to tick on two years of negotiation for the UK’s exit from the EU. In the meantime, we have seen heavy falls in UK equities, sterling has slumped, and we can anticipate further short-term volatility. But what are the key questions emerging from the Referendum results from a NI perspective?
- What does it mean for economic growth?
Economists will be revising down their forecasts for UK economic growth this year, and slashing them for next year. Economists in the Republic of Ireland will be doing likewise. The UK economy will slow in the second half of this year, with growth expected around 1.6%. We expect this growth rate to be halved next year. Northern Ireland’s growth prospects will be even less favourable where it will feel the chill of both the UK and Republic of Ireland economic slowdowns. Whether this means a return to negative rates of growth (and recession) remains to be seen. However, it certainly can’t be ruled out. The economic slowdown will require further stimulus from the Bank of England, so we anticipate Bank Rate to be lowered, possibly to zero with the potential for a fresh round of quantitative easing (asset purchases). The ECB is expected to provide additional stimulus as well. Doubts over EU funding for infrastructure investment and research could also impact upon economic growth.
- What does it mean for the public finances?
The Referendum debate had put concerns over the UK’s public finances on the back burner during recent months. However, they will soon very much be back on the agenda. At the time of the March Budget, it was already clear that the Chancellor had broken two of his three fiscal rules. The possibility of meeting his third rule – having a fiscal surplus by 2019/20 – was hanging by a thread. Meeting this rule was predicated on certain welfare reforms that have not actually been implemented. Now, with the downward revisions to economic growth resulting from the Referendum result, the public finances are going to go from bad to worse, due to tax receipt forecasts being hit hard. The net result is that the public finances will be in much worse shape than had previously been expected, and this will cause more public expenditure headaches for Northern Ireland. Fiscal austerity had been knocked back into later years of the Parliament, it may have to been pushed out even further. In the very short-term, however, the UK economy requires a fiscal stimulus not additional austerity. The Chancellor will not introduce his pre-referendum pledge for an Emergency Budget. However, the next Chancellor in the autumn will face the same challenges. More tax and less public expenditure are inevitable. It is the timing and scale of these changes that will have to be determined.
- What does it mean for household finances?
The overall negative impact on economic growth and the public finances will have a detrimental effect on households. Alongside tax rises, we would expect to see a pickup in consumer price inflation – the MPC could well finally meet its 2% target next year. A weaker pound means the cost of imports will rise which will feed through into higher food prices, petrol prices and other consumer prices in due course. Already we have seen sterling fall to its lowest level against the dollar since 1985. Disposable incomes have been boosted due to the fact that inflation has been rising at a lower rate than wages, as pressure on businesses and the public finances could make pay rises in both the public and private sectors difficult. We could see this reverse again next year with disposable incomes being squeezed. On a positive note, homeowners with mortgages linked to the Bank Rate will likely see reductions in their monthly mortgage payments. The lower for longer interest rate environment that will result is not good news for savers and people paying into pensions. Pension funds are already being hit by the increasing incidence of low / negative yields in bond markets. This in turn means people will have to save even more and work longer to get less.
- What does it mean for trade?
In the short-term, the fall in the value of the pound will provide a boost to exporters, not least in our largest export market the Republic of Ireland and the US. However, Sterling weakness is a double-edged sword as the cost of imports will start to rise. Private sector firms in the Ulster Bank NI PMI had already been signalling a marked increase in input cost inflation due to a rise in energy costs and wage pressures (due in part to the recent introduction of the National Living Wage). This could lead to a squeeze in profitably. In the longer-term, there is a bigger question around what our trading arrangements with the rest of the world will be. Will we remain in the Single Market? If not, what tariffs will apply to the price of the goods that we import and export? Even if we leave the Single Market, firms seeking to trade with the EU will still have to adhere to their rules and regulations for as long as they have to trade there. The EU provides applies a Common External Tariff (CET) which protects some industries against cheap global imports. Changes to the CET could bring both opportunities and threats to the NI economy. For example, cheaper food imports, benefiting consumers, at the expense of local food producers. Another trade angle often forgotten about concerns energy. Northern Ireland is part of an All-Island energy market with electricity flowing between the two jurisdictions. What are the implications for this arrangement if the UK leaves the EU?
- What does it mean for tourism?
As with trade, the immediate impact from a weaker pound makes NI a competitive destination for tourists. Not least with our nearest neighbour the Republic of Ireland. The local tourism industry could also be given a boost via the ‘staycation’ market due to the increased cost for NI people of holidaying in other currency zones, including the Republic of Ireland. Input cost inflation, notably food and energy, will be an unwelcome development. The longer-term issue is what happens with our border with the Eurozone. Will a hard border with the Republic of Ireland emerge? A big objective of the tourism authorities is to attract US visitors and others holidaying in the Republic of Ireland to visit and stay in NI as well. A hard border would hinder the achievement of this goal. Linked to that, if people from NI are holidaying in the EU in future, will we face longer passport control queues / additional security checks? The tourism industry also sources a significant share of its workforce from the rest of the EU. What will happen to this existing workforce and where will the future supply of labour come from?
- What does it mean for foreign direct investment?
The pursuit of FDI has been a big objective of NI policymakers. And a key reason why NI has been attractive to these foreign-owned companies is access to the EU market of 500million people (the largest single market in the world). Indeed, it is questionable whether some of them would be here at all, without this market access. That’s not to say that all of our inward investors trade with the EU. Some of the more recent inward investors are cost centres, providing services to parent companies in the US and UK. However, they are often reliant on imported skills from the rest of the EU. And many companies located in Northern Ireland trade internationally under EU trade agreements. How will the UK’s new trade arrangements outside the EU look and how will they compare, particularly for financial services? The Referendum result therefore raises questions about the ability to attract FDI in the future – and remember this is a key policy objective. It also raises questions about the sustainability of foreign investment already here. The UK Foreign Secretary has suggested that the flow of foreign inward investment into the UK has all but dried up. Until there is clarity around what our new trading and immigration arrangements will be, will the same be true of NI? Meanwhile, other companies may defer or cancel their investment plans.
- What happens to NI’s planned reduction in corporation tax?
NI’s flagship economic development policy tool must now be in question, and its potential value will no doubt be revisited. An introduction of a cut to 12.5%, funded by the NI Executive, was hoped to bring tens of thousands of jobs into the economy, but this was predicated on Single Market access (for trade and labour) and existing trade deals with outside the EU remaining. For many firms, market access trumps tax rates. There was resistance to funding the cut when the job creation benefits relative to cost were clearer. Now, even those who have been pro cutting corporation tax may find it difficult to justify the significant reduction in the Block Grant that might result. Some may say that leaving the EU would mean we wouldn’t have to fund the rate cut ourselves. But the Treasury may not want to gift NI this new policy lever for free. It now has other, bigger issues to deal with.
- What does it mean for jobs?
Slower economic growth and a potential return to recession would be accompanied by job losses and rising unemployment. Investment plans by companies will likely be postponed or cancelled which would hamper job creation and potentially mean that some staff would be surplus to requirements. Pressures on public finances will also likely mean public sector cuts, which would lead to further pressure on public sector jobs. Removal of EU funding will also present challenges for the Third Sector. The wider jobs issue is that of supply of labour. Nicola Sturgeon has already voiced concerns over access to skills. A number of industries are reliant on workers from the rest of the EU, including the NHS, the hospitality sector, food producers and aspects of manufacturing, and the construction sector, for instance. The Leave campaign has focused heavily on immigration. Where will these industries source their labour from if the tap is turned down in relation to incoming skills? NI people who want to work in the rest of the EU may also find that this is not an option post-Brexit. Since April 2016, skilled workers from non-EU countries must have a job offer and earn £35,000 p.a. to obtain a visa. Northern Ireland would have a lot of skilled job vacancies below this threshold. National and regional skills requirements vary considerably. How will NI firms, care homes and the NHS fill job vacancies below this £35k threshold if they can no longer access EU labour?
- What does it mean for agriculture / agri-food?
There will be a significant short-term gain for the agri-food sector from the exchange rate, with sterling considerably weakened. This includes short-term benefits both for exports and subsidies currently paid by the EU. But concerns within the sector are focused outside of exchange rates and are longer-term. These concerns include what will happen to the Common Agricultural Policy (CAP). It is difficult to see how NI will get as favourable terms outside of the EU as it does inside. It is also feared that the agri-food sector could face the steepest tariffs. Sourcing from the rest of the EU will also be impacted. Another threat concerns the EU Common External Tariff (CET). Currently this is set to keep prices high and discourage cheap imports. UK producers would suffer if the new tariff with e.g. South America was lowered / removed. It remains to be seen what will be negotiated with regard to labour mobility. Overall, NI’s agri-food sector is a bigger proportion of the economy than in any other parts of the UK, so the sector will be watching negotiations with some interest.
- What does it mean for politics?
Before the EU Referendum, the focus had been on sorting out the public finances and recovering from the last financial crisis. This was still very much a work in progress. Now instead of the government investing its focus on finishing this important job, the whole machinery of government will now be tasked with renegotiating our relationship with the EU. This means issues such dealing with the NHS and the economy have been relegated in importance. Political risk and uncertainty is on the rise in both the EU and the UK.