Irish Examiner Article 06/05/2011

I had a piece carried today by The Irish Examiner on Ireland’s recent trade performance.

Trade Is Keeping Our Economy Afloat

I’m not sure the piece fully agrees with the headline!  The piece is a slimmed down version of an original article that is included below the fold.  This also includes a number of additional details that also belie the above headline.

The main point is that while the headline trade figures appear to give support to the concept of an ‘export-led recovery’, I think that once you dig down into the figures in a little more detail the impact of these trade improvements ‘on the ground’ is negligible.  

Much of the commentary on the Irish economy since the turn of the year can be captured by just two sound bites - ‘burn the bondholders’ and ‘export-led recovery’.  Regarding the latter a lot has been made of Ireland’s export performance and how targeting this sector will point us on the path of the ‘road to recovery’.

The Irish economy has performed disastrously over the past three years and when measured by Gross Domestic Product (GDP) has contracted by nearly one-fifth in nominal terms since its peak in 2007, but it appears that the domestic and trading economies are moving in opposite directions. 

Since 2007, the contribution of final domestic demand to GDP has contracted by 27% falling from €171 billion in 2007 to €125 billion in 2010.  There has been a 13% drop in household consumption, a 5% fall in government expenditure on goods and services, and a staggering 65% drop in investment (driven mainly by the stalling of house-building in the private sector and the delaying or cancelling of infrastructure projects in the public sector).  The domestic economy is now showing levels of economic activity comparable to those seen in 2003.

On the other hand, the contribution of trade to GDP has increased by 70% since 2007 and is at record levels.  This increase in the trade balance has offset some of the drop in the domestic economy, and without this, Irish GDP figures would be even more horrific.

Ireland ran a trade surplus of more than €29 billion in 2010.  This is a 70% increase on the €17 billion trade surplus recorded in 2007.  The figures show that on the merchandise side there was a trade surplus of €37 billion while for services there was a trade deficit of €8 billion.  The services deficit has increased from €3 billion in 2007 to €8 billion in 2010.  The increased contribution of trade to overall GDP is dependent on the activity on the goods side. 

It is important to determine the impact that this apparent positive trade trend has on our economic reality.  Is it simply a case that this makes our GDP arithmetic appear more positive or is there merit to the claims of an ‘export-led recovery’, that is, can this trade improvement be transformed into jobs?

In 2007, the merchandise balance was €24 billion.  In 2010, it had surged to €37 billion.   Our trade balance is now the second highest in the EU, lower only than Germany.

To understand the causes of this we must look at the constituent flows that made up the trade balance – exports and imports.  In 2010, goods exports were €84 billion and goods imports were €47 billion.  Subtracting one from the other shows that there were €37 billion more in goods sold to the rest of the world than goods bought from the rest of the world.

The €24 billion merchandise balance in 2007 was the difference between the €84 billion of exports and €64 billion of imports.  Although our trade balance has increased since 2007, the level of exports is almost identical. Goods exports were €84.1 billion in 2007 and were slightly lower at €83.9 billion in 2010.   It is increased exports that will lead to increased employment and compared to 2007 our exports have not grown at all.

Trade might be making record contributions to Irish GDP but, up to now, it has not been ‘export-led’.  Recent figures from Eurostat show that, in 2001, Ireland had the second slowest growth of exports in the EU, with only Luxembourg performing poorer.  It is changes in imports that has caused the trade balance to rise to record levels.

In 2007, Irish imports were €64 billion.  For 2010,  imports were €47 billion.  It is this €17 billion drop that accounts for the entire €17 billion increase in the trade balance.  The country is buying fewer goods from abroad.

Separate CSO data that examines the flow of goods show that only one-third of total goods imports are of consumption goods and these are down about 14% since 2007.  The greater bulk of Irish imports are intermediate or capital goods for production.  Production materials account for just over half of Irish imports and these are down 32% since 2007.  Capital goods for production make up one-eighth of Irish imports and these are down 37% since 2007.  We are buying fewer goods from abroad, but we are buying fewer goods for production and manufacturing.  This is not a good thing.

More than two thirds of the €17 billion drop in imports since 2007 is accounted for by one category – Machinery and Transport Equipment.  Imports in this category were €25 billion in 2007, but fell to €12 billion in 2010.  All the main sub-groups in this category have fallen but the most pronounced decline has been in our imports of Office Machines and Computers.  Between 2007 and 2010, imports under this heading have fallen by almost three-quarters. 

It is evident that some of this is due to the slowdown in domestic consumption, but that alone cannot account for a €7 billion drop in the import of computers.  The picture becomes clearer if we look at what happened to our exports of computers.  For the same category, exports have fallen from €12.6 billion in 2007 to only €4.5 billion in 2010.   At the same time as imports of computers fell from €7 billion, exports of computers fell by €8 billion.

These computers weren’t being imported for domestic use, they were imported for re-export.  For example, there were huge imports of computer components, which were shipped to Limerick and assembled at Dell’s former manufacturing facility there for re-export to the European market.   The imports are gone, the exports are gone and the 2,000 jobs in Dell are gone.

With exports of computers tumbling since 2007, it is clear that exports elsewhere must have increased as our total exports have been largely unchanged over the same period.  Exports of Chemicals and Related Products were €43 billion in 2007 and this increased to €52 billion in 2010.  This sector now accounts nearly 60% of total goods exports from Ireland and its impact dominates our export figures.

At the aggregate level, there is some justification for describing Ireland’s recent export performance as “resilient and robust”, but if the Chemicals category is excluded from Irish exports,  the pattern is rather different.  Excluding Chemicals, 2010 exports were 20% lower than those recorded in 2007 and the “strong”  performance compared to 2009 is not reflected in the actual growth of exports excluding Chemicals of just 2%.  It is also important to realise that the 10 largest exporting companies accounted for 34% of total exports in 2009.  Changes in a small number of companies can mask the actual trend across most companies.

If we look at Ireland’s trade balance excluding Chemicals we see that it virtually disappears.  Excluding Chemicals, there was a surplus of only €185 million across all other export categories.  The equivalent of 99.5% of the merchandise surplus is generated by the Chemical and Pharmaceuticals sector alone.

In the ten years from 2001 to 2010, Chemical exports increased by more than 50% and have risen from being one-third of total exports to nearly two-thirds.  Forfás, the enterprise board,  survey Irish exporters and their dataset covers 85% of our total exports by value.  Data from the Survey of Business Impact from Forfás confirm these increases in Chemical and Pharmaceutical exports.  The Forfás data have the added advantage of measuring employment. 

The Forfás Employment Survey shows that total employment in the chemicals sectors was 26,060 in 2001.  By 2009, employment in the sector was 25,352.  In the period when the Chemical and Pharmaceutical sector has provided by far the strongest export performance and has led the our overall export growth, employment in the sector has fallen.  Just over 1% of the workforce produce 60% of Irish merchandise exports.

The same Forfás survey shows that foreign-owned firms provide about 91% of Irish exports and that these firms export 96% of the output they produce in Ireland.  Irish-owned firms contribute 9% of exports and around 38% of their output is exported.  However, when the effect of these companies on the Irish economy is measured by the payroll expenses and the amount of goods and services sourced from Ireland there is little or no difference. 

Irish-owned companies made a direct contribution of €18.8 billion to the economy in 2009.  Foreign-owned companies contributed €19.1 billion to the economy.  The Irish firms with 9% of exports had 123,000 employees.  Foreign-owned firms with 91% of exports had 127,000 employees.  The difference will expand once the fact that 62% of the output of Irish-owned firms is produced for the domestic market.  However, the point remains that because the foreign-owned firms are in high-value, capital-intensive industries we can see substantial increases in the value of output and exports but with a negligible effect on employment.  It is not exports we need, it’s employment.

It must be said that in recent months things have been painting a more positive picture, but we must be careful not to overstate the situation.  Exports in nine of the ten categories reported by the CSO’s External Trade Statistics were higher in 2010 than they were in 2009, though six of these are still below the 2007 levels.   For the last six months of 2010, exports were 15% higher than in the same period of 2009.   Exports in Food and Live Animals are up 12% of 2009, for Other Manufacturing the increase has been 14%.  Behind Chemicals, these are two of the largest exports categories.

There is little doubt that Irish exports are recovering.  There remains doubt about the potential of converting this into jobs growth in the face of an unemployment crisis that has more than 300,000 people currently out of work.