Irish exporters enjoyed a very strong 2015, buoyed by very favourable currency moves and (not unrelated) solid economic growth in a number of key trading partners (specifically, the US and UK). Goods exports and imports data show that the trade surplus surged 39% y/y to an all-time high of €44.0bn in 2015, propelled by a 20% y/y increase in exports (to €111.0bn) that was partly offset by a 10% y/y rise in imports (to €67.0bn). Preliminary national accounts data for 2015 show that services exports rose 10% y/y (to €110.0bn) last year.

While idiosyncratic factors pertaining to the multinational sector frequently distort headline export figures, a deep dive of the data confirm that last year’s merchandise export improvement was broad-based, with annual growth recorded in six of the nine major commodity groups. Currency effects played a key role in last year’s marked increase in merchandise exports to Ireland’s major non-Eurozone trading partners, the UK (+13% y/y) and US (+21% y/y).

Some 14% of Irish goods exports went to the UK in 2015. An analysis of the euro-sterling exchange rate and Irish goods exports to the UK unsurprisingly confirms that a strong pound is generally good for Irish exports, while a weak pound is unhelpful.

Thus, the cheerfulness that had prevailed in 2015 has recently given way to caginess in the Irish export sector as a sterling sell-off (from 70p in mid-November to c.79p at the time of writing) has reversed some of the gains seen during 2015.

A run of weak UK economic data and confirmation of a deferral of Bank of England monetary policy normalisation contributed to the swing. Yet the main driver behind the recent sterling weakness has been a growing appreciation of the risk from ‘Brexit’ – the possibility that the UK might vote to divorce itself from the rest of the EU.

The picture is similar for the US (the destination for 22% of Irish goods exports), as the euro-dollar exchange rate has moved to close to $1.14 recently from as low as $1.06 in November. The dollar has softened due to revised expectations around the evolution of US monetary policy, with market participants anticipating a more dovish out turn than the Federal Reserve has been guiding. Recent solid labour market and Manufacturing PMI data suggest that these expectations may need to be tweaked before long, however.

Given all of the above, it is no surprise that while the export components of the Investec Manufacturing and Services PMIs for Ireland indicate that growth continued into the New Year, the pace at which it is doing so has eased from the rates seen during 2015. Without a doubt, the key event for the Irish economy this year is the UK’s referendum on EU membership in June.

What do the polls tell us about the risk of ‘Brexit’ occurring? Some 93 opinion polls have been conducted since the start of 2015. Of these, 68 saw a plurality of voters opt to ‘Stay’, 21 saw a victory for the ‘Leave’ camp and the other four ended in a tie. The average lead for the ‘Stay’ side across all of these polls is 5.7%.

There are two factors across these polls that merit highlighting. The first relates to the persistently high proportion of undecided voters (close to one in six of all of those polled since the start of last year). This creates a not insignificant element of uncertainty given the relative closeness between the ‘Stay’ and ‘Leave’ camps.

Secondly, the referendum itself may not bring an end to the uncertainty should it result in victory for the ‘Leave’ side. The mechanics around the practicalities of a Brexit are less than clear cut – there is no template for a country to detach itself from the EU – and a divorce could take two years (possibly longer) to finalise.

What would happen to Ireland in the event of a Brexit? In the near term, we would likely see further downside pressure on sterling, which would be negative for Irish exporters to the UK. While the UK accounts for 14% of aggregate Irish goods exports, a detailed examination of trade data reveals that a number of sectors are particularly exposed to our near neighbour. Nearly 40% of Food exports went to GB in 2015, with other large shares recorded by the likes of Beverages & Tobacco (19%); Manufactured Goods (43%) and Machinery & Transport Equipment (16%).

On the services side, the latest available annual data (for 2014) show that Irish services exports to the UK in that year totalled €20.2bn (20% of total services exports). We expect that this has grown since then, given the strong performance by services exports in 2015 (+15% y/y in nominal terms).

As with the goods sector, Irish services exports are dominated by multinationals, but areas such as Tourism and Transport would be damaged by a further sterling softening. Might there be any benefits to Ireland from a Brexit? There has been speculation in some quarters about the potential benefits that would accrue in terms of FDI wins (as Ireland would be the largest English-speaking country left in the EU in the event of a UK departure) and the possibility that some financial services activities could relocate from ‘The City’ to Dublin’s IFSC. Comparable UN data show that Ireland attracted the fifth highest FDI inflows of the 28 member states of the EU over the six years to end-2014, so this country has a proven track record of punching above its weight.

With that being said, we would consider this to be mere speculation at this juncture. As noted above, we don’t know how a ‘Brexit’ would impact the UK’s relationship with the ‘rump-EU’. While some have mused that a UK exit could result in punitive tariffs being imposed by Brussels, this seems fanciful given the former’s importance to the rest of the EU – the UK ran a merchandise trade deficit of £88.7bn with the rest of the EU in 2015.

However, we don’t see Brexit happening. Assuming that we are right, this should lead to a strengthening of sterling after the referendum and Ireland’s current export headwind from the pound will then give way to a tailwind.

Philip O’Sullivan is Chief Economist with Investec Ireland