Central Bank monitoring Irish lenders with UK exposure to gauge Brexit risks

The impact of Brexit on the Irish economy is likely to be “negative and material,” the Central Bank deputy governor has said, as she revealed it is monitoring the effects on Irish banks with UK arms.

New data yesterday showed that the UK economy sped up at the end of 2016.

But over the whole year it was weaker than previously thought and there were signs that the Brexit vote will increasingly act as a brake on growth in 2017.

Business investment in the UK fell and slowing household spending growth raised questions about the outlook for 2017.

The Central Bank here thinks there is some potential for a positive impact on Irish growth as a result of Brexit, from higher cross-border investment by companies opting out of the UK.

Central Bank deputy governor Sharon Donnery said yesterday that this investment may go beyond the financial sector to include new investment in the technology and fintech sectors.

However, the fallout on other parts of the economy, including Irish exports to the UK, means the overall effect here will be lower growth, she said in a speech at the Irish Centre for European Law, Royal Irish Academy, Dublin.

She also warned of volatility in the period between Brexit being triggered and new arrangements being put in place.

“In the context of these key channels, our forecasts incorporate a negative adjustment to projected GDP growth because of Brexit-related factors amounting to about 0.6pc in 2017 and 0.2pc in 2018,” she said.

The Central Bank is also closely monitoring Irish banks that have a large exposure to the UK, she said, identifying it as a potential channel for contagion into the Irish market.

Both Bank of Ireland and AIB operate in Northern Ireland. Bank of Ireland in particular also has a substantial business in Britain, its UK operations add up to around 40pc of all lending.

Meanwhile, the pound fell after yesterday’s figures from the UK’s own Office for National Statistics (ONS), which no longer showed Britain was the fastest-growing major advanced economy last year.

Gross domestic product rose by 0.7pc in the fourth quarter, faster than the preliminary reading of 0.6pc thanks to manufacturing and the strongest growth since the fourth quarter of 2015.

The figures are likely to reinforce UK finance minister Philip Hammond’s view that there is no case right now to borrow more to help the British economy when he announces his annual budget on March 8.

But he will keep a close eye on warning signs in Wednesday’s data. The ONS also trimmed its estimate for 2016 growth to 1.8pc from 2pc, due to businesses stockpiling fewer goods and materials in early 2016.

That pushed Britain’s economic growth rate slightly below Germany’s 1.9pc.

Separate ONS data showed Britain’s dominant services sector expanded in December at the slowest pace in seven months.

Angus Armstrong, director of macroeconomics at the National Institute of Economic and Social Research, said the familiar pattern of consumers driving the economy was likely to fade.

“The UK economy needs another driver if it is not to have a significant slowdown in 2017,” he said. “The pattern of strong consumer spending and weaker business investment can only be a limited one.” (Additional reporting Reuters)
Article Source: http://tinyurl.com/kbwqb42