Wednesday, June 17, 2015

Exports: Dipped in Chemicals but Driven by Dollars

This week’s monthly External Trade data from the CSO showed that goods exports in April reached an all-time high of €9.2 billion.  Here are the monthly export and import figures for goods since January 2010.

External Trade

The rise in exports has also seen the trade balance increase though the recent movement in imports is also important.

Trade Balance

As is well understood around 60 per cent of Irish exports come from one sector: chemical and related products and it is this sector which accounts for the recent surge in overall exports.  Chemical exports in the first four months of 2015 are 26 per cent greater than in the equivalent period in 2014.

Chemical Exports

So what explains this recent increase in pharmaceutical exports?  Typically we could look to Industrial Production data to track what is being produced but those figures data (and for the pharmaceutical sector in particular) are polluted by the effect of external ‘contract manufacturing’.  Here are the monthly industrial production indices for chemical and pharmaceutical products since the start of 2010.

Chemicals Industrial Production

The ‘volume’ index measures the output actually produced in a given month, while the ‘turnover’ index measure output sold in a given month (regardless of when it was produced).  Both measures show a 50 per cent year-to-date increase but a lot of the rise (and volatility) is due to the impact of ‘contract manufacturing’ – this is manufacturing that takes place elsewhere but is booked in Ireland because key parts of the value-adding risks, functions and assets are based here. 

There might have been an increase in pharmaceutical output produced in Ireland (and only goods which physically leave the country are included in the External Trade data) but we can’t see that from the noisy Industrial Production figures.

Is there something else that accounts for the increase in chemical exports? Yes, prices. Or more particularly the currency in which those prices are denominated.  A huge amount of the pharmaceutical output produced in Ireland is generated by US MNCs and these companies price their products in dollars in their transfer pricing agreements.  And what has happened to the USD-EUR exchange rate recently?

Dollar Euro Exchange Rate

Yip, the dollar has appreciated by about 20 per cent against the euro since the middle of 2014.  Thus dollar-denominated prices will have a higher nominal euro value.  And that is precisely what we see if we look at the industrial price index for pharmaceuticals.

Pharma Industrial Prices

Since the middle of 2014 the wholesale price of pharmaceuticals has risen by 15 per cent (which was likely driven by the depreciation of the euro).  It is this factor which accounts for most of the recent rise in the value of pharmaceutical exports shown in the External Trade data.

Will this have much of an impact on GDP? Real GDP growth should not be affected by the price/currency factors shown above.  And there probably won’t be much impact on nominal GDP as the increased value of goods exports pushing up the balance of trade will be offset by increased outbound royalty payments (which will also be dollar denominated) that will reduce the balance of services.  The net effect will be small.  And of course the impact on GNP will be nil unless there is an increase in employment and/or corporation tax payments – but somebody is paying more Corporation Tax.

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