This is our Central Forecast currently for Northern Ireland (and the UK/EU generally) after last week’s referendum. Clearly, there are hugely varying scenarios possible, including political and economic conditions spiralling out of control.
The UK will exit the EU (under Prime Minister Theresa May) in Spring 2019, agreeing an EEA deal minus Financial Services access in return for some additional controls of movement of labour (somewhere between “Norway Model” and “Swiss Model”). Significant variations of this scenario are possible, ranging from remaining within the EU with some additional border controls to a completely disorderly exit with no deal.
The UK (and Northern Ireland) will enter recession in Spring 2017 and the economy will contract during 2017, with recovery not beginning properly until 2019. It is possible the UK (but not Northern Ireland) will avoid technical recession; conversely a disorderly exit could cause an economic shock beyond that of the 2008 “Credit Crunch”.
The UK debt burden will hit 100% of GDP in 2017 and the deficit will remain almost as high in 2020 as it was in 2015. Although we do not expect the debt in itself to be more expensive to service (contrary to some forecasts), a combination of inflation plus the fact the deficit was due to have been closed by the end of the decade means there will be a marked reduction in funds available for public services and welfare provision (we estimate this reduction will be around 3% versus previous, pre-referendum forecasts). There is little variation of this forecast as it is determined by uncertainty around the UK’s future status, rather than the status itself.
UK public spending and welfare provision will be reduced by 8% versus previous pre-referendum forecasts which, combined with higher unemployment (thus welfare bills) will see spending on public services reduced by 14% versus pre-referendum expectations. This will lead to significant strain on Health and Care services in particular. As with the above, there is little variation on this forecast.
UK consumption will reduce 3% in 2017 and will not stabilised until late 2019. This will particularly hit the retail and hospitality sectors, and there will be disinvestment in city centres. The property sector will also be hit, with a knock-on effect on local government services. Again, there is little variation in this forecast.
EU funding will cease to be available for most cases, particularly Rural Development, from 2020. UK will retain access to EU funds for business R&D (except in financial services and agri-food) and for infrastructure. CAP and CFP will be withdrawn from 2019/20 and, outside England, will need to be replaced by devolved Executives.
There will be neither an immediate General Election or a second Scottish independence referendum, but this is an uncertain forecast. There remains the possibility of an early UK General Election to approve a negotiating strategy or exit deal; a Scottish referendum is highly unlikely this decade although we do expect polls consistently to indicate in-principle support for Scottish independence.
UK party political turmoil will continue through the next election, with potential for radical change up to a potential change in electoral system and the Barnett Formula. UKIP is currently likely to form the Opposition after the next General Election. Political debate will shift from internal social issues to immigration and economic development. Despite reductions in public spending, there will be downward pressure on taxation with Corporation Tax potentially being abolished altogether. It is this political uncertainty which feeds into instability in the real economy.
Northern Ireland will attain “Special Access” to the EU, including potentially a Shared Customs arrangement, as its citizens generally qualify for EU citizenship and it shares a land border with the EU. This will mean more EU support is available than elsewhere in the UK, but CAP and CFP will cease as elsewhere in the UK. There will be a surprising degree of political stability but significant strain on public services due to reductions in funding provision versus previous assumptions (these will be marginally less marked than elsewhere in the UK, but still significant). The voluntary/community sector will be particularly hit in Northern Ireland, as many EU or EU-related funding streams simply come to an end without prospect of replacement. There will be the need for significant reform and collaboration.
The UK’s long-term economic outlook is marginally poorer than it was pre-referendum, but with the potential advantage of regional re-balancing due to less dependence on the finance sector and the City of London. The most significant risk to the UK is its loss of reputation for political stability, and loss of faith in its institutions. The longer-term viability of the Union itself, however, remains in question, which could bring further economic shocks. This forecast cannot now be made with any precision, as there are too many variables.
The Eurozone will generally avoid recession but will be subject to a marked slowdown in the short term. There are also significant political risks, with notable elections in 2017 in the Netherlands, France and Germany and the increased focus on issues forced by populists across the continent. Recession, and the election into government of populists opposed to EU membership, remains a risk in almost every EU country currently, although there is no prospect of any committing to an in/out referendum.
Sterling will stabilise at just under $1.30 and €1.20, but will be subject to occasional significant volatility. It remains possible that Sterling will stabilise significantly lower than that, particularly against the US dollar.