More questions than answers for Northern Ireland economy after Brexit
We’ve all now heard that ‘Brexit means Brexit’. But for most of us, that still leaves a lot of questions unanswered, particularly around what is going to happen to things like trade, labour, and funding.
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, as well as the US.
However, sterling weakness is a double-edged sword as the cost of imports will rise, as will the cost of living for households.
In the longer-term, there is a bigger question around what our trading arrangements with the rest of the world will be. The new Chancellor has stated we will leave the single market.
If so, what tariffs will apply to the price of the goods 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 while they trade there. The EU 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 local 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 with the UK leaving the EU?
Foreign direct investment
The pursuit of FDI has been a big objective of Northern Ireland policymakers.
And FDI is a lot wider than just the firms Invest NI is targeting. It also includes mergers and acquisitions and property. Indeed some of our largest indigenous companies have been acquired by foreign investors who have since reinvested in them — access to the single market of 500million people has been a key motivator for some of them.
That’s not to say that all of our inward investors trade with the EU. Some of the more recent examples 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 new Chancellor has said that single market access for the financial services sector is key. The scaling back of any headquarter functions in the City of London could have implications for back offices elsewhere, including Belfast.
The Referendum result therefore raises questions about the ability to attract FDI in the future. It also raises questions about the sustainability of foreign investment already here. The former UK Foreign Secretary, now Chancellor, has suggested 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 Northern Ireland? Meanwhile, other companies may defer or cancel investment plans.
Slower economic growth and a potential return to recession would be accompanied by job losses and rising unemployment. Some 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.
There will also continue to be pressures on the public finances, including the need for increased taxation. The age of austerity hasn’t come to an end, though the pace and timescale of it will change. The removal of EU funding will also present challenges for the third sector and our universities. Access to collaborative EU research is a motivating factor for academics and the loss of this will make working in UK universities less attractive.
The wider jobs issue is that of supply of labour. A number of industries are reliant on workers from the rest of the EU, including the NHS, the hospitality sector, food producers, aspects of manufacturing, and the construction sector, for instance. Where will they source their labour from if the tap is turned down in relation to incoming skills?
Northern Ireland people who want to work in the rest of the EU may also find 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 per year 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 Northern Ireland firms, care homes and the NHS fill job vacancies below this £35,000 threshold if they can no longer access EU labour? Northern Ireland also has shortages of unskilled labour, with EU nationals plugging this gap. Any points-based immigration system is unlikely to enable access for unskilled labour.
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.
The EU CET is also a threat to agri-food. Currently this is set to keep prices high and discourage cheap imports. UK producers would suffer if the new tariff with, for example, South America was lowered/removed.
It remains to be seen what will be negotiated with regard to labour mobility. Overall, Northern Ireland’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.
In next week’s Economy Watch, we hear from Neil Gibson of the Ulster University economic policy centre