The risk of a hard Brexit presents a real threat to the Irish economy, according to the Central Bank of Ireland, as it urged businesses to prepare for all scenarios.

According to the bank’s third quarterly bulletin of 2018, published on Monday,  the Irish economy is growing at a robust pace, with domestic demand expected to grow by 4.4% this year and 4.1% next year.

However potential risks include potential trade war in the US and Britain’s exit from the European Union.

Mark Cassidy, the Bank’s director of economics and statistics welcomed the robust economic growth and employment but says external factors could create problems.

“There are economic risks facing Ireland from several fronts that cannot be ignored.

“It is clear that a ‘hard’ or disruptive Brexit remains a material risk, while the threat of potential trade wars and changes to international taxation have not abated.

Brexit
The Irish border in the village of Bridgend, Co Donegal (Brian Lawless/PA)

“We have put into the public domain what we think the impact of a hard Brexit with no trade deal at all would be, over the medium term, our estimate is that it would have a negative impact on output of 3.2% over 10 years, with around 40,000 fewer jobs over that same period.

“If its a sudden Brexit, we will expect more of the effects in the first few years.

“We need everyone in all parts of the economy to prepare for all scenarios in relation to Brexit.”

He added that those hit most by Brexit will be firms reliant on exports to the UK, like the Agri-food sector.

The last quarter’s robust economy is supported by the strength of domestic activity and favourable international growth, however as the economy moves towards full capacity, the bank say there is a risk that continued expansion could give rise to overheating pressures.

The unemployment rate is forecast to average 5.4% in 2018, revised down from 5.6% in the April bulletin, and 4.8% next year.

As unemployment has come down quicker than expected, and the outlook is strong for the next two years, the bank say there is scope for more ambitious fiscal targets.

Mr Cassidy added: “Newer targets would increase financial buffers and help avoid a situation where government policy itself would contribute to overheating pressures within the economy which could damage economic competitiveness.”

Inflation is expected to remain moderate at 0.7% this year and 0.8% next year.

“The continued growth in the economy, which is broadly balanced between domestic and export activity, is to be welcomed,” Mr Cassidy said.

“So too is the projected growth in employment, with our economy due to benefit from an additional 100,000 net new jobs by the end of 2019.

“Domestically, the strength of economic growth means our economy risks hitting full capacity, which gives rise to the risk of overheating or boom-bust cycles.

“This underscores the importance of building fiscal buffers during the good times.”