Northern Ireland Nears Recession as ‘No-Deal’ Brexit Fears and Government Crisis Take Toll

July 20, 2018 Updated: July 24, 2018

Northern Ireland is on course for an economic recession, warns a UK industry association, amid growing fears of a “no-deal” Brexit, compounded by the instability of a collapsed power-sharing arrangement in government.

The Confederation of British Industry (CBI) said the latest figures from the Northern Ireland Composite Economic Index (NICEI), an experimental new metric similar to the GDP, showed “worrying levels of economic contraction.”

“The region looks to be on the brink of recessionary territory,” said Angela McGowan, CBI’s Northern Ireland director, speaking to the British publication the Guardian.

The NICEI figures, published on July 19, show Northern Ireland’s economic output fell by 0.3 percent over the last quarter and 1 percent over the last year.

By comparison, the United Kingdom’s output has increased by 1.2 percent over the past year.

‘Sound and Fury’ Versus Pragmatism

“Clearly the current political vacuum and Brexit uncertainty are taking their toll on economic performance,” McGowan said, according to the Belfast Telegraph.

“Our country is at a crossroads” with decisions being made now that will “shape the UK for generations to come,” CBI Director-General Carolyn Fairbairn cautioned at Tuesday’s Farnborough Air Show, also attended by British Prime Minister Theresa May.

In her speech, Fairbairn urged politicians in the EU and UK to cut through the “sound and fury” surrounding the terms of Britain’s exit from the European Union, and put pragmatism and the economy first.

“I came through Westminster [the UK Parliament] on my way here this morning,” she said. “You could feel the crackling in the air of parliamentary electricity after last night’s fractious votes. But we do need to see through the sound and fury of the politics to what really matters.”

Hard Brexit, Soft Border

What appeared to matter a great deal to Theresa May, who spoke to politicians and business leaders during a visit to Northern Ireland’s Belfast on Friday, is a form of Brexit that leaves the border between the two Irelands as soft as possible.

British Prime Minister Theresa May delivers a keynote speech at the Waterfront Hall on July 20, 2018, in Belfast, Northern Ireland. The prime minister is on a two-day visit to Northern Ireland. During her visit, focussing on Brexit and the deadlock at Stormont, she will visit the Irish border and discuss the potential impact of Brexit with Northern Irish businesses. (Charles McQuillan/WPA Pool/Getty Images)

“The economic and constitutional dislocation of a formal ‘third country’ customs border within our own country is something I will never accept and I believe no British prime minister could ever accept,” May said.

She decried the prolonged Northern Irish government crisis, in which London has to run things in the territory from afar until a local, or “devolved” government, is formed.

“It is a matter of frustration and regret that after enjoying the longest period of unbroken devolved government since the 1960s, Northern Ireland has now been without a fully functioning executive for over eighteen months,” she said in Belfast.

May also called on the European Union to strike a deal that prevents a hard border and demanded Brussels quickly respond to her new “white paper” plan–known as Chequers for where it was signed–in order to avoid a no-deal Brexit.

The 4 Brexits and Their Price Tags

Some British lawmakers said the country should leave the EU and trade on World Trade Organization terms—another term for the “no-deal” scenario—if the EU makes too few concessions.

According to Boris Johnson, now former foreign secretary who resigned last week, the Chequers plan, which includes an agreement to follow “a common rule book” with the EU on regulations and standards governing the goods trade, is “in important ways … Brexit in name only.”

In a published statement, Johnson likened Chequers to “volunteering for economic vassalage.”

The UK’s chief Brexit negotiator David Davis also quit over the Chequers plan.

Davis sent a bluntly worded resignation letter to May, saying he would not be a “reluctant conscript” to the plan.

“In my view the inevitable consequence of the proposed policies will be to make the supposed control by Parliament illusory rather than real,” wrote Davis.

“As I said at Cabinet, the ‘common rule book’ policy hands control of large swathes of our economy to the EU and is certainly not returning control of our laws in any real sense.”

Fairbairn, however, whose voice echoes that of captains of industry, calls for a pragmatic approach that puts economic interests above national sentiment.

“This is a blueprint that, behind the headlines, behind the politics, gets pretty close to the answers firms were looking for,” she said of the Chequers plan.

“It’s not perfect. There are gaps to fill, not least more to be done on services, which make up 80 percent of the UK economy. But the proposal for a free trade area in goods with a common rule book is exactly what businesses have asked for. It will protect supply chains across Europe,” Fairbairn said.

Disrupted supply chains are among the risks identified by the International Monetary Fund (IMF) in its July 19 study on the possible consequences of Brexit.

A logo for the 2017 Annual Meetings is seen inside the International Monetary Fund (IMF) headquarters in Washington, DC, during the 2017 IMF Annual Meetings on October 10, 2017. (Andrew Caballero-Reynolds/AFP/Getty Images)

The IMF estimates that if the UK leaves without a preferential customs agreement—the “no-deal” option—European Union countries will suffer long-term damage of up to 1.5 percent of annual economic output.

Ireland would be the worst hit, followed by the Netherlands, Belgium, and Luxembourg. Germany would also suffer due to industrial supply chains.

“The long-run impact of Brexit is likely to be unevenly distributed across countries, with Ireland exhibiting the highest exposure,” stated the report.

The economic damage from Brexit would be minimal if Britain were to adopt the “soft Brexit” Norwegian-style model of being part of the European Economic Area. May has rejected this variant, as it would largely require Britain to stick to EU rules.

In an impact assessment titled Study for Global Future, professor Jonathan Portes of King’s College, London, estimated Brexit as an annual cost to Britain, amounting to additional net borrowing each year by 2033-34.

A Norway deal (EEA rules) is the cheapest, at 17 billion pounds ($22.3 billion), with the “no deal” (WTO option) registering over four times that, at 81 billion pounds ($106 billion).

There are two versions in between, the Canada deal (Free Trade Agreement or FTA) at 57 billion pounds ($75 billion), and May’s own preferred tailor-made variant. According to Portes’ calculations, May’s comes in at 40 billion pounds ($52 billion).

The IMF did not estimate the costs of Brexit for Britain in its publication, which accompanies a two-yearly assessment of the EU, though earlier this week it downgraded its forecast for British growth this year to the weakest since 2012.

Before Britain voted to leave the EU, the IMF warned of a possible recession under an “adverse” scenario, drawing criticism from Brexit supporters.

Earlier this year Bank of England Gov. Mark Carney said Britain’s economy was around 1.5-2.0 percent smaller than it would have been if the public had voted to stay in the EU—not far from what the IMF forecast for a “limited” Brexit scenario.

Meanwhile, the European Commission issued a paper on July 19, instructing other EU states to prepare for a no-deal Brexit.

Possible consequences, the paper states, include disruption to the aviation industry and goods from the UK being subject to customs checks.

Reuters contributed to this report.

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