Ireland’s economic recovery has been exceptional but is incomplete and now subject to large downside risks after Britain’s vote to leave the European Union, the International Monetary Fund said on Thursday.
Ireland’s economy has bounced back rapidly since it left an IMF aid programme in 2013 but is considered more vulnerable than any other in the EU to Brexit.
Irish exporters to neighbouring Britain already report difficulties amid cuts to economic forecasts.
The IMF became the latest institution to trim its forecasts for gross domestic product (GDP), predicting 4.9 percent growth in 2016, versus a forecast of 5 percent in April, and 3.2 percent in 2017, down from 3.6 percent.
The forecasts closely match revised projections from the central bank and government, though the IMF are slightly more pessimistic about prospects for next year.
It foresaw a significant adverse effect on Ireland if the post-Brexit period features prolonged uncertainty over Britain’s new relationship with the EU, a larger-than-expected slowdown there and in the rest of Europe and higher financial market volatility.
“Should the repercussions be larger than anticipated, the authorities should stand ready to take remedial actions, such as a countercyclical fiscal policy if and when needed,” the Fund said in a report following its Article IV meetings with Irish authorities.
The meetings took place before dramatic revisions to data earlier this month that showed Irish GDP ballooned by 26 percent last year after a reclassification of multinational companies activity.
The IMF said the economic developments at the basis of its report remained valid but advised authorities to develop additional metrics to better reflect underlying economic activity that it said had yet to benefit parts of the population and is spread unevenly regionally.
The Fund also carried out a separate comprehensive assessment of Ireland’s financial sector, which it said has strengthened significantly since the crisis and undergone major structural changes, but faced similar challenges over Brexit.
Irish bank exposure to Britain accounts for around 21 percent of total assets, according to the central bank, and the IMF said the Brexit uncertainty is very likely to have negative effects on the Irish financial system, at least in the short term.
“Adverse effects are likely to come mainly through banks’ operations in the UK and a slowdown affecting Irish firms, employment, and investment, rather than short-term market volatility and funding risk,” it said.
“The impact could be large, but should still be manageable.”