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In this issue:
Brexit: One Year On
– in three quotations
The UK Economy
on the anniversary
of the referendum
Exchange rates and
Irish tourist market:
more than meets the
eye?
Issue 5, 29th June 2017
Brexit Watch
Fortnightly briefing on Brexit developments
DKM Commentary: A year has passed since the United Kingdom voted to leave the European Union. Today,
rather than a disintegrating EU, deep cracks are becoming visible in the United Kingdom:
Brexit has embittered relations between devolved powers and Westminster and the recent
DUP-Conservative deal is likely to exacerbate these tensions. Rifts are also emerging within
the Conservative Party, once a model of party unity. According to senior Conservative
sources (and many political commentators), Theresa May’s days as party leader are
numbered.
That the UK economy is taking the hit from this political uncertainty and apparent lack of
preparation on the part of its government is not surprising. The UK Chancellor’s stated focus
on jobs and a soft transition in Britain’s exit from the EU is hardly going to quell fears where
the ‘WTO option’ is still on the cards – especially when from an economic perspective, no
Brexit would be better than any kind of Brexit. The EU economy, on the other hand, is
showing promising signs of growth and EU leaders are demonstrating a hitherto unseen unity
in the face of Brexit.
Fears of exclusion and a similar imbalance in economic strength between continental
economies and the UK first prompted the UK to apply to join what was then the European
Economic Community. Yet, it appears improbable that such concerns could now prompt it to
remain, despite recent emphasis placed on the door being open to do so by some EU leaders
and officials.
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United Kingdom Davis acquiesces as Brexit talks begin
On 19 June, negotiations between the UK and the EU on the UK’s
future withdrawal from the economic and political union began.
Addressing the press after the first day, the EU’s chief negotiator
Michel Barnier noted that the two parties had agreed on three
core issues: dates, organisation and negotiating priorities. In
coming to such an agreement, the UK has accepted the EU’s
proposed structure for the talks, which UK Secretary of State for
Exiting the Union, David Davis, had previously rejected.
UK offers deal on EU citizens’ rights
Theresa May has made an offer on EU citizens’ rights post-Brexit.
The UK Prime Minister proposed that EU residents in the UK
maintain their current rights and entitlements if they have been
living in the UK for five years. Those who have not been resident
for a minimum of five years on the day the UK leaves the EU will
be entitled to stay five years to acquire those rights. The deal is
offered on the basis that it is reciprocal on UK citizens in the EU.
On the question of the European Court of Justice acting as
guarantor of such rights, the Irish Times reported a certain level
of ambiguity in her position. This is in stark contrast to the words
of Brexit Secretary, David Davis, who, back in May had rejected
the idea that the European Court of Justice could oversee rights
of EU citizens post-Brexit. European leaders, including
Germany’s Angela Merkel have claimed the deal was a ‘good first
step’ but does not go far enough.
Hammond’s hopes for orderly and open Brexit
In his Mansion House speech, UK Chancellor of the Exchequer
Philip Hammond emphasised that Brexit must be conducted in
such a way that prioritises “British jobs, and underpins Britain’s
prosperity”. Mr Hammond noted that transitional arrangements
were necessary to achieve this, along with a comprehensive
trade agreement and “frictionless” customs arrangements. In
particular, the Chancellor noted that an implementation phase
could see the UK outside the Customs Union but with current
customs arrangements staying in place.
DUP and Conservatives strike a deal
After 18 days of negotiations, the Democratic Unionist Party
(DUP) struck a confidence-and-supply deal with the UK
Conservatives, allowing Theresa May to form a government. In
the deal, the DUP agreed to support the Conservatives on all
motions of confidence, the Queen’s speech, the Budget, finance
bills and money bills, in addition to supporting the Government
on legislation pertaining to the UK’s exit from the EU and on
legislation pertaining to national security. In return, the DUP will
receive £1bn extra in funding for Northern Ireland in areas such
as infrastructure, health and broadband.
European Union Dream Big? At the first EU summit since the beginning of Brexit negotiations,
President of the European Council Donald Tusk indicated that he
hoped Brexit could be reversed. Addressing a question he claims
he is often asked by British colleagues, that of whether Brexit
can be reversed, Mr Tusk quipped: “You may say I’m a dreamer,
but I’m not the only one”.
Taoiseach Leo Varadkar stated that he would be open to a
change of mind from the UK, following earlier remarks by French
President Emmanuel Macron who insisted the door to remain
was still open.
Other heads of state or government have been less keen to
vocalise any welcome to remain towards the UK. Indeed, Belgian
Prime Minister Charles Michel’s outright opposition to Mr Tusk’s
comments were clear: “I am not a dreamer and I am not the only
one”.
Macron’s En Marche! en masse
As predicted from first round results, Emmanuel Macron’s party,
La République en marche! (LREM) secured a landslide victory in
the second round of elections for the French National Assembly.
The president secured a ‘presidential majority’, with the LREM-
MoDem coalition having secured 361 of 577 seats in the
assembly. The rate of voter abstention was the highest in forty
years, leading some commentators to call the victory “skin
deep”. However, the result means that Mr Macron will face little
political opposition to his radical reform plans.
Ireland ESRI estimate a €600m loss in Irish fiscal space over
next three years
In its recently published Quarterly Economic Quarterly, the ESRI
estimated that in the case of a ‘hard Brexit’, where the UK relies
on WTO rules for trade with the EU, Ireland will sustain a loss of
€600m in fiscal space available to the Government over the first
three years following the UK’s exit. This is due to a reduction in
potential output following a hard Brexit, owing to its impact on
the traded sector of the Irish economy and its knock-on effects
on the non-traded sector. EU fiscal policy surveillance is heavily
reliant on potential output estimates. A spending growth rate
exceeding the medium-term potential growth rate would require
the Irish Government to implement “additional discretionary
revenue measures”, i.e. raise taxes, to compensate.
Lack of NI executive complicates Brexit border talks
EU and Irish sources have confirmed that the absence of a
Northern Ireland executive is delaying detailed discussions on
the Northern Irish border. According to the Irish Times, sources
cited the absence of a unified voice in the form of an executive in
addition to the delay in the formation of a DUP-Conservative
deal as factors hindering progress. The deadline for forming an
executive (29 June) is unlikely to be met.
Political Developments
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CPIH % Change over 12 months %
On 20 June, almost a year since the UK voted to leave the
European Union, Bank of England Chairman Mark Carney,
addressed guests at the Mansion House. Mr Carney once again
insisted that the BoE had no intention of raising interest rates,
citing “anaemic” wage growth and mixed signals on consumer
spending and business investment as reasons for his decision.
Sterling fell sharply in response.
Inflation increases
The UK economy, which initially appeared to defy predictions of
weak growth in the wake of Brexit, is starting to show signs of
distress. Nominal Average Weekly Earnings (AWE) (total pay) in
the three months to April 2017 grew by 2.1%. Yet, inflation,
measured using the Consumer Price Index including housing
costs (CPIH), grew by 2.6% in the twelve months to April 2017.
As noted in Issue 4, CPIH and CPI are rising in the UK, with the
latest release for May 2017 showing the 12-month CPIH rate at
the highest level since April 2012 at 2.7%.
Real wages waver
Real AWE (total pay) fell by 0.4%, compared to the same period
in 2016, the three months to April 2017. According to the Office
for National Statistics (ONS) this is the first average year-on-year
decrease seen in real AWE (total pay) since the 3 months to
September 2014.
Pound problems
The consistent weakness of Sterling since June 2016 is affecting
inflation and Mr Carney has emphasised its role in marking down
the UK’s economic prospects. However, it jumped on 28 June
after Mr Carney indicated he would support a rise in interest
rates if business investment begins to increase, having come
under pressure to say when he would vote for an increase
following the BoE’s position eight days previously.
Brexit: One Year On
What they said then....
It’s a hard Brexit or no Brexit
In October 2016, European Council President Donald Tusk
made his position clear regarding the possibility of a ‘soft’
Brexit, where the UK could remain within the single market
while ending or limiting the free movement of EU citizens.
“Have cake and eat it”
Captured in a photo of a handwritten memo from a meeting
of the Department for Exiting the EU back in November 2016,
this saying was seen as summing up Britain’s (and Foreign
Secretary Boris Johnson’s) approach to Brexit.
Parallel negotiations
From as far back as July 2016, the UK Government sought to
have talks on UK’s new trade agreement with the EU in
parallel with negotiations on how the UK will disentangle itself
from EU law.
What they’re saying now...
“You may say I’m a dreamer”
Mr Tusk appears to be canvassing for the option of ‘no
Brexit’ rather than a hard one in June 2017 with this
controversial answer to the question of whether Brexit is
reversible.
“Discourage talk of ‘cake’ amongst my colleagues”
This statement by UK Chancellor Philip Hammond at a
meeting of Angela Merkel’s CDU party has been
interpreted as mocking Mr Johnson and hints at divisions in
the Conservative cabinet.
Citizens, Brexit Bill and Ireland first
At the first talks in Brussels on 19 June 2017, Brexit
Secretary David Davis agreed to the EU’s structure for
negotiations. This means the question of EU Citizens, the
amount the UK owes and the question of the Irish border
will be addressed before trade talks begin.
The UK Economy: One Year On
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UK Average Weekly Earnings (total pay): real and nominal, whole economy, seasonally adjusted
Real Nominal
Index: 2015=100
Source: ONS Source: ONS
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Graph 3: Tourist Trips to Ireland by GB Residents (000s) and UK Real Average Weekly Earnings (2015=100)
Tourists from Great Britain Real Wages
Index: 2015=100
Sector Focus: Tourism In addition to having an impact on goods exports, Brexit is also
likely to affect Irish services exports. In recent weeks, concerns
have been raised by senior figures from the Irish tourism
industry about the drop in UK tourists visiting Ireland, shown in
the latest CSO figures. This has been connected to the drop in
value of Sterling: when the UK voted to leave the EU one year
ago, the pound fell in value sharply against the Euro and has not
since recovered its former value. This section seeks to
investigate the drop in UK visits and the link between exchange
rate and UK tourists in Ireland.
The graph below (Graph 1) displays the CSO data on trips taken
to Ireland for ‘holiday, recreation or leisure purposes’ (i.e.
tourists) in Q1 of 2016 and 2017, by country of residence.
It is clear that the number of tourists from Great Britain has
dropped compared with Q1 2016 numbers. Recent figures
released by the CSO on Overseas Travel to Ireland also show a
drop in visitors from Great Britain in Q2 2017 compared with Q2
2016, although data on the breakdown of visitors by reason for
visit (i.e. tourism, business, etc.) are not yet available.
Graph 2 (below) is an attempt to investigate how the exchange
rate has affected the amount of tourists from Great Britain
visiting Ireland over the last five years.
Not so clear cut?
Graph 2 shows that the total number of British tourists increased
in Q3 of 2016 (post-referendum) to its highest point since 2012.
Moreover, although the number of GB visitors on holiday in Q1
2017 is lower than Q1 2016, the number of British tourists in
Ireland in Q1 2017 is still higher than Q1 2015, where the
exchange rate was averaging at approximately £0.74 to the Euro.
On the face of it there does not appear to be a strong
relationship between the value of the pound and the number of
UK tourists coming to Ireland (correlation coefficient = 0.30 over
the last five years). One explanation could be that holidays are a
luxury item and the fact that a holiday has become slightly more
expensive does not change the decision to go or not – in the
short term at least. Another could be that Ireland is not known
for being a cheap destination or as a shopping destination, hence
fluctuations in exchange rate may not lead a British person to
cancel or change their holiday plans.
It is more probable that the apparent drop-off in GB visitors to
Ireland reflects other factors such as a fall in UK real wages or
uncertain future financial expectations rather than exchange
rate falls. Graphing the number of GB tourists in Ireland beside
UK real wages over this period (Graph 3) indicates that this may
be a better explanation for the drop off in tourists coming from
the UK (correlation coefficient = 0.61 over the last five years).
Thus, once a British resident decides they can afford to go on
holiday to Ireland, exchange rate fluctuations would not deter
them.
Does it matter?
Whether due to low wage growth or a weak pound or some
other reason, Ireland has seen a drop in UK tourists. However, it
is important to correctly diagnose the likely cause of this
reduction, to better understand current trends. For example, our
analysis suggests that if Euro were to fall in value against
Sterling, Ireland might not receive more UK visitors. Moreover, a
low sensitivity to exchange rate fluctuations over the past five
years may indicate that GB tourists do not view Ireland as a
cheap, cross-border shopping destination – if this were the case,
we would expect a higher sensitivity to changes in currency
value.
Economic Insight
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France Germany Italy Other Europe
USA & Canada
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Graph 1: No. of Tourists to Ireland by Country of Residence (000s)
Jan-Mar 2016
Jan-Mar 2017
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Graph 2: Tourist Trips to Ireland by GB Residents (000s) and € to £ Exchange Rate
Tourists from Great Britain
Exchange rate €/£
Source: CSO; ONS
Source: CSO; ONS
Source: CSO