Tuesday 19 November 2019

Brendan Keenan: Heard the one about good news turning out to be bad?

A positive Central Bank report masks a tougher climate for Irish companies

THERE are lots of those "good news, bad news" jokes, but the joke is always the same. The good news turns out not to be so good after all. Sometimes the bad news is better.

One shouldn't laugh. The danger with good news is that, even when true, it may cloud people's judgement. Maybe even lead to bad decisions.

Two inter-linked pieces of "good news" appear in a new analysis from the Central Bank: the country's reduced economic dependence on Britain, and the resilience of exports since the crash.

Admittedly, there are no laughs. The good news is not what it seems. The reality is that we are still hugely dependant on the UK market, and the sterling rate. And the export story is not quite as good as it might seem either.

This is not very bad news. The figures have always shown the importance of Britain for Irish-owned exporters -- who are the ones who create most jobs in the export sector. And exports have done pretty well in this global crisis.

But it has become almost politically incorrect to stress the UK market -- still less to make it the national priority -- while all the talk of success in the export sector risks complacency about its manifest difficulties.

They are summed up in that ugly word, "competitiveness". Ugly -- and dubious.

Some economists have argued that, while one may be more or less competitive in this or that, there is really no such thing as "competitiveness."

In Ireland's case, not only is the concept vague but, as the paper makes clear, it is difficult to know what exactly is going on.

Much of its authors' efforts go into disentangling foreign and local companies, to find out what matters and how what matters is doing. The scale of this challenge can be gleaned from the simple statistic that 90 per cent of Irish exports come from multi-national operations. Of these, 60 per cent are from the chemicals and pharmaceutical firms alone.

That makes conventional measures of competitiveness more or less useless in the Irish case. We do know that labour costs in particular, have fallen since the crash. But how much that matters depends on where they have fallen and the impact such costs have on the firms involved.

This might help answer an important question raised by the paper. Why has industrial employment fallen by 20 per cent when manufacturing output is back above pre-crash levels?

One answer is that, when foreign and native are disentangled, the local firms were not as resilient as might seem.

The encouraging thing is that such firms behaved quite normally, and seem quite flexible. Their exports do track changes in labour costs quite closely. But they also track the level of sterling.

The story since the crash seems to be one of significant cost-cutting by firms. Most of this -- as other data shows -- came from shedding jobs rather than reducing wages.

That may be the best option for the companies, but it is a pity that the system does not do more to favour employment -- although shorter hours have played a major role in keeping people in work.

Wages are still rising in some multi-nationals, which hides the scale of cuts in local companies. The true reduction in costs may be closer to 20 per cent than the 40 per cent measured by simple division of output by workers. That is still significant, with costs still rising in most European Union countries.

But these improvements were stymied by the sharp fall in sterling in the early years of the Great Recession. The research shows that they did lose business as sterling tumbled, but they do seem to have coped. The rise in sterling since then may well bring some comfort, even with demand weak in the UK.

One uncomfortable conclusion is that a convincing solution to the euro crisis might not all be good for the Irish economy, if it strengthened the single currency. Luckily, if that's how you see it, there seems very little chance of that happening.

More fundamentally, the improvements in competitiveness are not the good news of a problem solved, but of a problem which can be solved -- or at least reduced -- by further action.

Many of those are old favourites. Energy prices are above EU averages -- especially for the small firms to which we must look for future growth. The cost of business services has fallen, but remains high. The cost of public services still seems to be rising, as government tries to extract more revenue from its customers.

More will have to be done. The paper points out that the new balance in Ireland's dealings with the rest of the world partly depends on the fall in consumption of imported goods. We are still a long way from paying for the consumption we would like with sales of our own products and services.

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