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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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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