Manufacturing growth slowed to its lowest level in over two years in January in one of the first signs that Brexit and a loss of momentum globally may start to hurt the booming economy, a new survey showed today.
Ireland has weathered the initial uncertainty from the 2016 Brexit vote, posting the fastest economic growth in Europe for five years in a row.
But the Central Bank warned last week that a 'no deal' Brexit could knock as much as 4 percentage points off the growth rate in its first full year.
The AIB manufacturing purchasing managers' index slipped to 52.6 from 54.5 in December.
It remained above the 50 mark that separates growth from contraction for the 68th successive month but the pace of growth was the slowest since October 2016, in the aftermath of the British referendum.
The dip was mainly due to softer consumer demand in both the domestic and international markets, AIB said, with some panellists also suggesting that Brexit uncertainty was weighing on orders from the UK.
"The slower pace of growth evident since last summer in the Irish Manufacturing PMI survey is not surprising, as it is consistent with the loss of momentum by the global economy over this period," AIB's chief economist Oliver Mangan said.
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"The survey highlights that Ireland cannot be complacent about a continuation of the very strong growth that the economy has enjoyed since 2013. However, the reading is still consistent with solid growth by the sector," he added.
The softer demand nevertheless slowed the rate of job creation in the sector to a 16-month low while a sub-index for inventories of finished goods increased for the second consecutive month to 51.6 from 50.9 at the end of 2018.
A number of respondents increased their inventory holdings due to new product launches this year, but others suggested that they had built stocks in order to guard against any delays resulting from Brexit, AIB said.
Oliver Mangan, chief economist with AIB, said today's PMI reflects what is happening internationally. "We're a very export-orientated economy and what we've in recent times, particularly in Europe, is a marked slowdown in our main export markets.
Mr Mangan said that growth has been slowing for a number of months, and that does point to slower growth for the economy as a whole in the coming year.
The survey shows that input costs are also rising for Irish manufacturers, but the easing in international demand is what is creating the most concern amongst firms, the economist said.
As growth has eased it has given manufacturers the space to clear the backlogs they had built up in recent times. Should lower growth remain for the forseeable future, Mr Mangan said that inventories will rise - which ultimately could impact hiring in the sector.
"Stock levels will rise and then companies will begin to scale back production," he said. "They'll be watching their inventory levels very closely, but it will all be driven by demand in the global economy.
"Employment is probably the last indicator you'll see weaken in those circumstances, we have a very tight labour market, unemployment is very low, so employers are going to be very reluctant to let workers go," he said.
Brexit will have a huge impact on the kind of demand companies will be facing in the coming months - and with no sign of a deal at present it is hard to know what will happen from April onwards.
However Mr Mangan said that, in the event of a no-deal scenario, the effect will be quite immediate.
"If we saw a no-deal hard Brexit the first place you're going to see it is in the exchange rate," he said. "We're currently at 87 pence in terms of the sterling-euro exchange rate, that could move to parity very, very quickly.
"It would be unexpected if there was a shock, hard Brexit at the end of March - we would have questions around its impact, in terms of the ability to trade freely with the UK, how quickly will that disrupt trade patterns, the land-bridge to Europe. That would impact sentiment and would give quite a shock to the UK market, which is still quite an important market, especially for indigenous industries," Mr Mangan added.
