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ulster.ac.uk
The WTO Option and the Northern Ireland Economy
Dr Eoin Magennis, Senior EconomistUlster University Economic Policy Centre
March 2017
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Agenda
• What is the WTO Option?
• How equipped is the NI Economy to meet this: overview, challenges and forecasts?
• NI and the trade question
• Closing thoughts
@UlsterUniEPC
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What is the WTO Option?
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Why would you take the WTO option?
Ø Makingachoice…
• UKisstrongenoughto‘goitalone’andrelyingontheWTOwouldallownewtradedealsoutsidetheEUregulationsorhavingtotakeaccountofagri interests
• WTOoptionsopensupthepossibilityofre-orientingtradetowardsnewemergingmarkets
Ø …orthebestofanecessity:
• Twoyearsoftalksafter29March2017tosettlethetermsofthedivorce(monies,assetsand‘custody’)
• Onlywhenthesearefinished/agreedwilltalksformallybeginonfuturerelationshipsovermovementofgoods,services,people,etc.
• WTOmembershiporrulesmightbethefall-back,theavoidanceofacliffandtherealityofthehard/lengthytalksahead– howreadyistheUKtosigntradedeals?
A case of choice or necessity…
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What is the WTO and how does it work?
Ø Foundedin1995asaglobalframeworkfortraderelationsbetweencountriesandsuccessortoGATT(1948)andearlier1920sconferences
Ø Aimstoreducetariffs,eliminatenon-tariffbarriersandproducepredictabletrade
Ø Sameconditionswithoutdiscrimination offeredtoall164WTOmembers(95%ofworldtrade)withbaselinerulesongoods,servicesandintellectualproperty
Ø Membersmustapplyascheduleoftariffsorcombinationoftariffsandquotas(incaseofagriculture)
Ø Onlyexceptionswherememberssignbilateraldealsorenter‘customsunions’(eg:EU)orsigndealswithdevelopingcountries– notfreetradebut‘freertrade
Recent organisation with a long back story…
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What do the tariffs look like?Lowering levels but still significant for agri-food…
…and does not tell the full story for dairy, flour, etc
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Simply put this option is the hardest of hard Brexits…
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How fit is the NI Economy for this: overview, challenges & the future
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Context in economic growth strikingIrish GDP outstrips rivals
TheNorthernIrelandCompositeEconomicIndex(NICEI)isanexperimentalquarterlymeasureoftheperformanceoftheNIeconomybasedonavailableofficialstatistics.This measureofoutputallowscomparisonofGDPintheUKandtheRepublicofIreland
iSource:DETI
The‘recasting’moment
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Labour market just about recoveredLabour market – Irish performance more modest
Source:ONS(UK&NI)&CSO(RoI)
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Range of NI sectors growing
Source:ONS
Employmentchangebyindustry,NI,Q12012toQ32016
Shows a degree of resilience
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4 Key challenges to considerUnderlying economic weaknesses
1. NI Fiscal Deficit
2. Real income squeeze
3. Hidden labour market weaknesses
4. Productivity malaise
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Note:ExpenditurefiguresaresourcedfromtheNIBudget2015-16AccessedNote:Figuresmaynotsumduetorounding
Source:HMRC,NIExecutive,PESA
The NI Fiscal Deficit
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Real income squeezeA decade of no wage growth in NI and spending fuelled by borrowing
Source:ASHE&ONS,UUEPCanalysis
Source: Bank of England Source: Bank of England
Unsecured consumer credit heading back towards 2008 levels Credit based spending speeded up in the 2nd half of 2016
£0
£50,000
£100,000
£150,000
£200,000
£250,000
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Outstandingconsumercreditlendingtoindividuals
(millions)
-15%
-10%
-5%
0%
5%
10%
15%
20%
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Outstandingconsumercreditlendingtoindividuals-
12month%change
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Hidden labour market weaknessesPart-time employment and inactivity both increasing
Source:QES(Parttime=lessthan30hours)
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Productivity malaiseGermany 5 days, UK 6 days, NI 7 days!
Notes:DatabasedonUSDollar,constantpricesin2010PPP's.*denotesdataforselectedcountriesfrom2014Source:OECD,UUEPCanalysis
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Three scenarios for the UK economyConsumerskeepspendingandunemploymentkeepsfalling
Slowingeconomyasinflationbites,investmentflatandexports
bounceweakens
Consumptionstalls,governmentspendingisweakandtheonly
driverareexports
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…strong growth continuing (>2% pa) in Ireland but tapering off from 2018
Sources:Dept ofFinanceMonthlyBulletin(Nov2016)
ESRIQuarterlyEc C/tary Autumn2016OxfordEconomics(Nov2016)
CentralBankBulletin(Jan2017)OECDEconomicForecast(Nov2016)
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
2016 2017 2018 2019 2020OxfordEconomics ESRIOECD CentralbankofIrelandDepartmentofFinance Average
Brexit effectcominginfrom
2018?
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…while NI gets to avoid recession assuming Brexit does not go bad…
Baseline is a ‘muddling through’ scenario with little upside of 30,000 new jobs in next decadeJanuary2017
Source:UUEPC
Upper scenario- this is ‘highlyaspirational’ and assumes the NIemployment rate converges withcurrent UK level. This scenarioincludes lower corporation tax butis more influenced by thesuccession of the PFG.
Baseline- the most likely economicoutcome based on moderate‘Brexit’ assumptions, and noreduction in the rate ofCorporation Tax due to uncertaintyover price and mechanism.
Lower scenario- assumes a ‘Brexit’goes wrong scenario in whichtrade is severely impacted andconsumers contract spending.Outcome closest to the lowerestimates of long term GDP byindependent forecasters of ‘Brexit’for the UK.
46,000
47,000
48,000
49,000
50,000
51,000
52,000
53,000
54,000
55,000
Upperscenario Baseline Lowerscenario
Forecast
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NI and the trade question
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Significant currency devaluationGood for exports but creates inflation
Source:BoE
Dollarhasbeengraduallystrengtheningsince2008
Eurowasweakeningbutnowreversed
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EU28 Share of UK Total Exports (%)
Source:CBR
UKjoinsCommonMarket
SingleMarketestablished
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EU28 Share of NI Goods Exports (%)
Source:HMRCRTS
40%
45%
50%
55%
60%
65%
70%
75%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
EUshareofNIexports(%)
Average over the 20 years of two thirds of NI exports going to the EU28 and c.60% of this to the nearest market: Republic of Ireland
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How much are we exporting?Manufacturing sells 80% outside NI but most sectors less than 25%
Source:DfE
Challenge is clear: market concentration and too few exporters
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Cross-border manufacturing trade€3bn in goods…dominated by food & drink
Source:InterTradeIreland
49%
3%4%4%
7%
7%
4%
5%
4%
3%4%
6%
Sectoralshareofcross-bordergoodstrade
Fooddrinkandtobacco
Textilesclothingleather
Woodandwoodproducts
Pulppaperandpublishing
Chemicalsandchemicalproducts
Rubberandplasticproducts
Nonmetallicmineralproducts
Basicmetalsand-products
MechanicalEngineering
Electricalandopticalequipment
Transportequipment
Manufacturingnotelsewhere
By one estimate more than €300 million would be paid in tariffs under WTO rules, 85% of this payable by agri-food products
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How exposed are sectors to cross-border trade?
Agri-food and materials sectors most exposed
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Closing thoughts
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Closing thoughts
Ø Brexitwillbringchallenges:
• Processthusfarof‘promissoryslippage’islikelytocontinue
• Immigrationcontrolslikelyandthereforeaccesstotalent/labour
• WithWTOruleswillcomeaborder(howeverfrictionlessispromised)–politicalaswellaseconomicproblemswillresult– wherewillbeborderbe?
• Generaluncertaintyimpactsbusinessdecisionsbothinvestmentandrecruitment– likelytodeepenifWTOruleslooklikethedestination
• Asdetailsofnegotiations(andchoices)emerge,expectvolatilityinfinancialmarkets
Challenges certainly
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Closing thoughts
• Adealwillbestruck– inbothsidesinterests(assumingthedivorcesettlementisreached)toensuretradeandothercooperationcontinuegiventhemutualreliance(evenmoresointheNIcase)
• Thusfarthepessimisticassumptionsofindependentanalyseshaveprovenover-stated– willthiscontinue?
• Willadeflatedcurrencyandeasingofausterityhelpgrowthinshort-term?
• CantheUKpoliticiansremainasflounderingastheycurrentlyappear?
• Whatoptionscanbepresented(sectoral,migration,sub-regional)toensureNI’sbespoke/special/contingentneedsaremet?
… any silver linings?
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UUEPC Local Government TeamContact Details
Dr. Eoin Magennis, Senior Economist07825 140 [email protected]
Andrew Park, Assistant Economist02890 368 [email protected]
Laura Heery, Assistant Economist02890 366 [email protected]
@UlsterUniEPC