Jim Power on Brexit & how it affects us

Brexit poses significant challenges for Irish motor trade On June 23rd, 51.9% of the UK electorate voted to leave the EU, with 48.1% voting to remain. In the aftermath of the referendum, the economic and political situation in the UK has become shrouded in doubt, fear and uncertainty. Many sensible individuals and bodies had warned of the dire consequences of a vote to leave, and those consequences are now starting to play out in stark fashion. From an Irish perspective, the referendum result is not good news and it poses many short-term and long-terms risks and issues of concern.The short-term risks largely concern growth in the UK economy, and sterling weakness and volatility. The long-term issues relate mainly to the relationship the UK might have with the EU, if it does decide to leave and the consequent potential for barriers to free trade. Prior to the Brexit referendum, the UK economy had already slowed and the possibility of a recession, or at least a significant slowdown in growth, now looks like a reasonably high probability event in the near-term. Following the vote to leave, it is now up to the UK Government when it officially triggers Article 50, which is the article that would formally begin the process of leaving the EU. At that stage a two-year period of negotiation would begin among the other 27 EU countries to determine what sort of trading relationship the EU would have with the UK. If agreement is not reached in that two-year period, the UK would have to apply for an extension, subject to the approval of the EU-27, or failing that; it would then most likely have to adopt WTO trade arrangements, with tariffs. Once Article 50 is invoked, the power in the relationship shifts very firmly to the EU and away from the UK. The trade deal negotiated with the EU will have a major bearing on the UK economy and by implication, on Ireland. Options could include the arrangements that Norway and Switzerland have. Norway has access to the EU market for many goods and through the European Economic Area (EEA), but has to sign up for many of the regulations of the Single European Market (SEM) and has to make a contribution to the EU budget, equivalent to 90% of the UK contribution per capita. Norway has to accept the rules of the EU, but cannot influence them. In effect it has ‘Integration without Representation’. Switzerland has access to the EU market through a series of bi-lateral trade deals, but pays a contribution equivalent to around 50% of the UK contribution per capita, and also has to sign up for many of the SEM regulations. If the UK does decide to proceed with Article 50, it is not clear what sort of relationship will be negotiated, but it is clear that if the UK wants access to the EU market, it would still be bound by many of the regulations and financial commitments that it is in theory trying to break free from.

From an Irish economic and political perspective, there is much to worry about in relation to Brexit. The impact on sterling and hence on the competitiveness of the Irish export relationship with the UK; the future trading relationship that would be negotiated between the UK and the EU; the border with Northern Ireland; the implications for the all-island energy market; and the future of UK corporation tax policy (already the Chancellor has spoken about a 15% Corporation Tax Rate). Ireland could also lose a strong and sensible ally around the EU table, particularly in the face of the strong Franco-German axis. Ireland could benefit on the FDI front, but this would not be sufficient to offset the potential negatives.

For the motor trade in Ireland a number of issues stand out: If the UK economy does slow significantly or go into recession, this would obviously impact negatively on the Irish economy. It is estimated that a 1% decline in UK activity would knock up to 0.3% off Irish growth. A slowdown in the Irish economy would damage new car sales. A slowdown in new car sales would mean fewer trade-ins and hence some reduction in second hand car sales; Used car imports from the UK have become a significant feature of the Irish market in recent years. In 2015, 47,798 used cars were imported into the country, accounting for 27.7% of total car registrations. In the first 6 months of 2016, 32,285 used cars were imported, which was 27.7% ahead of the first half of 2015. Used car imports accounted for 24.2% of total registrations. The growth rate in used imports has increased progressively during the first half of 2016. The weakness of sterling has made imports more attractive, and if sterling remains at current levels or weakens further, imports from the UK could become an even more significant part of the market; Many motor industry businesses here in Ireland have strong connections with the UK and many are supplied through the UK, for parts and the like. While weaker sterling will make imports cheaper, the longer-term concern is that if the UK does leave the EU and does not negotiate access to the Single European Market, the potential for tariffs and quotas could become a reality. While many such imports may be manufactured in the Euro Zone but come to Ireland through the UK, the logistics of such trade would have to be altered to take account of a new reality; and The potential for an increase in imported cars due to sterling weakness, could have the effect of compressing the price of used vehicles here. However, many new cars are imported into the UK, so sterling weakness would increase the price of those imports, which in turn could make exports of used cars to the Ireland more expensive. Like most businesses in Ireland, Brexit will create significant challenges for the motor trade. It is difficult to identify any economic upside from an actual Brexit for the UK, Ireland or the EU in general. However, it is not difficult to identify the potential downsides. Given all of the unknowns, it is very difficult to be too prescriptive at this juncture, but it is difficult to be positive about an eventual Brexit. Uncertainty represents the major confidence-sapping issue at the moment. There is nothing better than uncertainty to sap business and consumer confidence. It is worth noting, that despite the referendum, UK exit is not a certainty. There is still a long way to go in this particular story. #Motor