ulster.ac.uk

The WTO Option and the Northern Ireland Economy

Dr Eoin Magennis, Senior EconomistUlster University Economic Policy Centre

March 2017

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

What is the WTO Option?

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…

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…

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

Simply put this option is the hardest of hard Brexits…

How fit is the NI Economy for this: overview, challenges & the future

Context in economic growth strikingIrish GDP outstrips rivals

TheNorthernIrelandCompositeEconomicIndex(NICEI)isanexperimentalquarterlymeasureoftheperformanceoftheNIeconomybasedonavailableofficialstatistics.This measureofoutputallowscomparisonofGDPintheUKandtheRepublicofIreland

iSource:DETI

The‘recasting’moment

Labour market just about recoveredLabour market – Irish performance more modest

Source:ONS(UK&NI)&CSO(RoI)

Range of NI sectors growing

Source:ONS

Employmentchangebyindustry,NI,Q12012toQ32016

Shows a degree of resilience

4 Key challenges to considerUnderlying economic weaknesses

1. NI Fiscal Deficit

2. Real income squeeze

3. Hidden labour market weaknesses

4. Productivity malaise

Note:ExpenditurefiguresaresourcedfromtheNIBudget2015-16AccessedNote:Figuresmaynotsumduetorounding

Source:HMRC,NIExecutive,PESA

The NI Fiscal Deficit

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

Hidden labour market weaknessesPart-time employment and inactivity both increasing

Source:QES(Parttime=lessthan30hours)

Productivity malaiseGermany 5 days, UK 6 days, NI 7 days!

Notes:DatabasedonUSDollar,constantpricesin2010PPP's.*denotesdataforselectedcountriesfrom2014Source:OECD,UUEPCanalysis

Three scenarios for the UK economyConsumerskeepspendingandunemploymentkeepsfalling

Slowingeconomyasinflationbites,investmentflatandexports

bounceweakens

Consumptionstalls,governmentspendingisweakandtheonly

driverareexports

…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?

…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

NI and the trade question

Significant currency devaluationGood for exports but creates inflation

Source:BoE

Dollarhasbeengraduallystrengtheningsince2008

Eurowasweakeningbutnowreversed

EU28 Share of UK Total Exports (%)

Source:CBR

UKjoinsCommonMarket

SingleMarketestablished

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

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

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

How exposed are sectors to cross-border trade?

Agri-food and materials sectors most exposed

Closing thoughts

Closing thoughts

Ø Brexitwillbringchallenges:

• Processthusfarof‘promissoryslippage’islikelytocontinue

• Immigrationcontrolslikelyandthereforeaccesstotalent/labour

• WithWTOruleswillcomeaborder(howeverfrictionlessispromised)–politicalaswellaseconomicproblemswillresult– wherewillbeborderbe?

• Generaluncertaintyimpactsbusinessdecisionsbothinvestmentandrecruitment– likelytodeepenifWTOruleslooklikethedestination

• Asdetailsofnegotiations(andchoices)emerge,expectvolatilityinfinancialmarkets

Challenges certainly

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?

UUEPC Local Government TeamContact Details

Dr. Eoin Magennis, Senior Economist07825 140 326e.magennis@ulster.ac.uk

Andrew Park, Assistant Economist02890 368 917a.park@ulster.ac.uk

Laura Heery, Assistant Economist02890 366 219l.heery@ulster.ac.uk

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