In Q2 2023, Coface upgraded its country risk assessment for Ireland, but the UK was left unchanged. The two countries have open economies and much else in common, but are they now moving in different directions? Coface’s economist, Jonathan Steenberg, looks at the factors behind their changing fortunes, the risks that lie ahead, and considers what the UK can do to catch up.
Country and sector risk headlines:
- Coface has improved its growth forecast for the global economy by 0.3 percentage points to 2.2%. However, the medium-term outlook for economic activity is lacklustre due to risk factors like persistently high core inflation, disruption to the banking sector, and the impact of climate change.
- Coface’s country risk rating for Ireland has been upgraded to A3. 12 other countries were upgraded, including Greece (A4) and emerging markets such as Bosnia-Herzegovina (c), Malaysia (A3), Nigeria (c), and the Philippines (A4).
- Two countries were downgraded: Kenya (c) and Bolivia (d).
- 13 sector assessments have been upgraded, notably the transport sector in Western Europe, thanks to an upturn in tourism, although risk is high overall. There have been the same number of downgrades, including pharmaceuticals in Western Europe (following the UK downgrade in Q1).
What factors led Coface to upgrade its risk assessment for Ireland this time?
The decision reflects our confidence in the resilience of the Irish economy, which has seen two years of double-digit growth since the pandemic. This will slow down this year, but there will still be solid growth, especially in the domestic economy. The country has a healthy budget balance, meaning the government has more flexibility to step up with support measures should they be needed. Relations with the UK, one of Ireland’s chief trading partners, are likely to improve following the Windsor Framework agreement on cross-border trade, and the country has a favourable business environment (rated A1). This may be one reason why changes to Ireland’s corporate tax rate (from 12.5% to 15%) have not prompted a queue for the exit of multinationals.
These positive signs are in contrast to June 2022, when we downgraded Ireland to A4 (reasonable), along with the UK and several other European countries. Back then, we were concerned that Ireland’s reliance on natural gas (like the UK) left it more exposed to the consequences of the war in Ukraine, alongside the state of trading relations with the UK at that time and the possible implications of the corporate tax changes.
What risks remain for the Irish economy?
The biggest headache would be a global slowdown because Ireland is more exposed as an open-exporting economy with a large multinational presence.
We are also seeing a return to pre-pandemic corporate insolvency rates in 2023, which means there is an increased risk of payment default. Insolvencies in the first quarter of 2023 were up 22% on Q1 2022, and we expect at least a 10% year-on-year rise across 2023. This would take us back to the levels seen in 2019 or slightly higher, but such a rise would represent a return to normality rather than an avalanche.
There are some political risks too. For example, Sinn Fein is becoming a greater political force in Ireland, which will obviously involve a recalibration of the current political system. In the medium term, it could also make the question of a United Ireland more potent and increase the possibility of a referendum. A more immediate cause of social tension is the cost of living: housing affordability is a problem, especially around Dublin, while wages have fallen in real terms in 2022 and are also failing to keep pace with inflation this year.
Are Ireland and the UK competitors? What common interests do they have?
In today’s global economy, it’s probably more accurate to say countries are partly competitors, partly collaborators, and partly consumers of each other’s goods. So, while one country might achieve stronger economic growth than others, this could also make it a more effective trading partner.
Overall, the trading relationship between the UK and Ireland is strong, and despite the recent bump in the road, it can and will improve. Unfortunately, SMEs are less likely to reap the benefits than larger companies with the resources to manage the increased paperwork and bureaucracy since Brexit.
What green shoots can you see in the UK?
Chronic pessimism seems to be the prevalent sentiment in the UK, but it has the right ingredients for growth: a highly educated society with great universities and a history of industry; strong pharmaceutical, ICT, and service sectors; and being ideally located for generating off-shore wind energy.
Compared to its peers, there has generally been a deficit in infrastructure, but the right investment could ignite growth, especially in the renewable sector.
What are the biggest trade risks in the UK?
Like Ireland, the UK is an open economy, and its fortunes depend to a large degree on stable trading relationships. However, export growth is currently sluggish, and the unstable geopolitical situation poses a significant risk, given the ongoing war in Ukraine and simmering tensions between rival spheres of influence, such as Europe and China, Europe and the USA, or China and the USA. Combined with the pandemic, this more divided world is already affecting global trade patterns and supply chains as companies seek to diversify their off-shoring activities and minimise disruption.
Despite Brexit, the EU remains an important market for the UK; it accounted for 42% of total UK exports in 2022, and so a deterioration in diplomatic relations could be damaging to trade.
Are political and social uncertainties holding businesses back?
If there is one thing that investors and businesses hate, it is uncertainty. The financial upheavals of the pandemic, the mini-budget, and concerns about the UK’s future trading relationships are important factors behind five years of underinvestment, which has hampered productivity (although underinvestment was a trend before that). Added to this are concerns about interest rates (after the latest BoE rise on June 22), which have yet to have an effect on persistently high core inflation while inflicting pain on borrowers.
If businesses are to thrive, they need stable governments, improved trade relations, and preferably clear industrial policies.
What needs to change before Coface upgrades the UK’s risk assessment?
To sum it up in three points: export recovery, which largely depends on a stable trading relationship with our main partners; a recovery in economic activity to pre-pandemic strength; and a fall in corporate insolvencies from the current surge.
Overall, there is plenty of potential in the British economy, but it needs stability before it can be realised.
The full Country and Sector Risk report and risk assessment infographics are available to download on the Coface website.
Economist for UK and Ireland