Monday 23 October 2017

Ireland's twin-engined exports purred nicely in 2015

‘Pharmachem exports are worth more than all other goods exports combined... there must be at least some concern that the economy’s export base has narrowed excessively’
‘Pharmachem exports are worth more than all other goods exports combined... there must be at least some concern that the economy’s export base has narrowed excessively’
Dan O'Brien

Dan O'Brien

Ireland's exports of goods surged by a barely believable 20pc last year, according to new figures published last week. The value of widgets shipped abroad stood at a massive €111bn in 2015.

With annual exports of services likely to grow at a similar rate, having already crossed the €100bn threshold in 2014, both of the economy's export engines are purring very nicely.

As the first chart shows, growth in the value of receipts from goods exports surged suddenly last year. Since the turn of the century, there has been no year like it. Indeed, after the Celtic Tiger period of the late 1990s, goods export growth was lacklustre at best. Services accounted for almost all of the increase in total exports in the 21st century.

A part of the increase in cash earned from exports was accounted for by a weaker euro - exporters receiving payments in sterling and dollars were flush, once they converted back into euro.

Both the dollar and sterling appreciated sharply vis-a-vis the euro last year. On average in 2014, one euro would get you $1.33; in 2015 it fell to $1.10. Similarly the euro-sterling exchange rate for one euro fell from £0.81 to £0.73.

The strengthening of US and UK currencies last year partly reflected the relatively strong economic performance of those economies, which further boosted demand for Irish goods and services.

The currency's weakness also gave the entire Eurozone a much-needed shot in the arm. The value of the bloc's goods exports grew by 5pc last year, with most of its individual countries recording gains.

The currency effect for Ireland was most marked in exports to the US, which rose by one quarter in value on 2014. But the exchange rate effect should not be overstated. Exports receipts from the UK grew at just 13pc last year despite the currency boost, while growth in sales to the rest of the Eurozone was higher at 19pc.

What's more, over the course of 2015 the very strong rate of growth accelerated, with the three-month rolling average annual increase trending upwards during the year.

The first graph shows that Ireland's goods exports are dominated by chemicals and pharmaceuticals, with the latter making up the lion's share of exports. In 2015 they also drove overall growth, accounting for most (69pc) of the increase in total export revenues.

With receipts surging to a record high of €64bn, pharmachem exports are worth more than all other goods exports combined. And the bulk of activity is down to drugs firms - nine of the world's top 10 drugs companies have manufacturing operations in this jurisdiction.

While pharma exports have surged, employment growth in that sector has also picked up, even if growth rates have not quite matched those of export receipts. The most up-to-date figures from Q3 2015 shows that 36,700 people were employed manufacturing pharmaceuticals - an all-time high. In the first nine months of last year, employment in the sector grew by almost one-tenth on the same period in 2014.

Irish-based pharma appears to have more than survived the so-called 'patent cliff', as favourable external factors and increased investment have helped weather that storm. While that is excellent news, there must be at least some concern that the economy's export base has narrowed excessively.

As noted above, well over half of all goods exports are accounted for by this one sector. On the services side, almost half of the total is accounted for computer services alone.

If the pharmaceutical or IT industries were ever to suffer a significant shock and exports out of Ireland declined sharply, the impact on Irish GDP could potentially be very large.

Just how a sector can decline quickly is illustrated by the huge decline over two decades in "Machinery and Transport Equipment" exports - a category that used mainly consist of computer hardware.

As can be seen from the first chart, exports in this category are a fraction of what they were at the turn of the millennium before computer makers moved production to lower wage countries.

A sector that once dominated Ireland's exports - agriculture - enjoyed its sixth consecutive year of steady export growth. Although accounting for only one-tenth of total goods exports (and half that when services are included), the sector remains a big employer, with over 100,000 people at work in the sector.

If the composition of Irish exports has changed dramatically over time, the change in the relative importance of individual markets has been no less marked.

As the second chart shows, the massive diversification of export markets over recent decades has meant trade with the UK as a share of Ireland's total trade has declined very sharply. Goods trade (exports and imports) with Britain accounted for half of the total in the early 1970s. Last year it was 19pc.

Although data for trade in services have only been compiled since 2003, they show a similar pattern and now account for a similar share of total services trade.

For this reason, among a number of others, the notion that Ireland would follow Britain out of the EU if that is the upshot of the forthcoming Brexit referendum makes no sense. It makes even less sense when one considers that 90pc of our total exports are accounted for by foreign companies who could very well leave Ireland if they did not have full access to the European market.

Another issue in the Brexit debate needs some clarity. There appears to be a widespread belief on both sides of the Irish Sea that a "special deal" could be worked out if Britain leaves the EU.

But there will be no special deal on trade. When a country joins the EU, it gives up the freedom to make trade deals with non-EU countries. Trade officials in Brussels have "exclusive competence" (in the jargon of the EU) to negotiate such deals. That is how it has always been because the EU is a "customs union", a deeper form of arrangement than a simple free trade bloc which does not bind members in their trade diplomacy.

If Britain leaves, London will negotiate a trade and investment deal with Brussels. All 27 EU remaining members, including Ireland, will have a say in those negotiations. Whatever terms are agreed will apply equally to all members and it is those terms upon which Ireland-UK trade relations will be based in the future - not some "special deal" negotiated bilaterally between Dublin and London.

To negotiate a bilateral trade deal, Ireland would also have to leave the EU. With nobody in Irish politics advocating an Irish exit, that will not happen.

Ireland's interests - economic and otherwise - dictate that if it does come to a choice between Britain and Europe, there will be no option but to choose the Continent.

Sunday Indo Business

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