Theresa May’s announcement has led to sterling falling again, now trading at over 87p against the euro
Sun, Oct 2, 2016, 15:15
Updated: Sun, Oct 2, 2016, 15:18
Britain’s prime minister Theresa May listens to the opening remarks on the first day of the Conservative party annual conference at the International Convention Centre in Birmingham. Photograph: Adrian Dennis/AFP/Getty Images
The decision by British prime minister Theresa May to announce that Article 50 will be triggered next March puts the focus on the Government here to deliver on its promise of a “Brexit-proofed” Budget.
The reaction of the foreign exchange markets to the announcement will be a key factor being watched from Dublin – sterling’s weakness after the referendum has hit Irish exporters and it remains to be seen what the currency market’s reaction to the Article 50 move will be. In early trading sterling was weak on Monday morning.
While speculation had been growing that the formal talks on an exit process would be triggered early next year, the announcement will concentrate minds in Dublin. So will the increasing noises about a “hard Brexit”and the likelihood that Britain will also leave the Single Market, raising significant questions about future trading relationships.
Fears of a major post-referendum hit to British economic confidence and growth have proved unfounded – so far – and most forecasters now expect the British economy to skirt recession. This will come as a relief to the Government in Dublin as it finalises its Budget sums. A recession in the UK would be likely to have hit growth here significantly, and certainly more than the 0.5 per cent cut in the 2017 growth forecast pencilled in by the Department of Finance.
Here, Tuesday’s exchequer returns for September will be a key marker of how our economy has fared over the months since the Brexit vote – the data for July and August showed taxes ahead of target for the year so far, but the monthly figures were a bit behind expectations. So far, there is no reason to expect a significant changes in Irish economic forecasts, or in the tax predictions which will underpin the Budget.
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The more immediate issue for Ireland is the value of sterling .
Before the referendum vote, sterling was trading at under 77 pence against the euro. It quickly rose after the vote to between 83 and 84 pence and – after ups and downs in recent months – is trading this morning at over 87p.
Fears of a “hard Brexit”, with the associated uncertainties about long-term growth in the UK, have hit the currency in recent weeks. This is already affecting food exporters in particular and IBEC, the business lobby group, said last week that “exporters are feeling an intense strain and jobs are at risk.”
In the days and weeks ahead, any signs of pressure on the British economy or uncertainties heading into next year’s talks are likely to weaken the currency further. And with real fears that the British government is fumbling to come up with any coherent strategy to manage the whole process, many investors continue to fell sterling is vulnerable.
Warnings by Nissan on Friday about its fears of facing tariffs to sell into other European markets – and a request that the UK government promise to compensate it if this happens – will be watched in currency markets.
The Budget may see some measures to support firms hit by sterling’s fall, but IBEC will push for something more comprehensive than the schemes introduced in response to a sharp sterling fall in 2008.
Brexit also raises longer-term economic issues for the Irish Government, with Britain likely to up its game in the search for inward investment and uncertainty about the long-term trading relationship.
The Budget is likely to see some measures to help entrepreneurs – through adjustments in capital gains tax – in response to arguments that Britain offers a more attractive environment.
Minister for Finance Michael Noonan may also tweak share option rules and will yet again underline Ireland’s commitment to the 12.5 per cent corporation tax rate. further measures to try to support inward investment here.
But Noonan has not got the cash to make any big reductions in personal taxation to bring rates here closer to those in Britain – and even if he did he might not want to. Nor can he afford sweeping changes to business taxes.
The Minister will promise that Ireland will hold the course to improving its public finances – and this will be a central part of the Budget message. The Budget can go some way in guarding against the risks of Brexit – and in particular could lay out some longer term strategies.
But with the Brexit process bringing huge uncertainties, there is only so much we can do to prepare.