Exports – the primary driver of economic turnaround

In the space of three weeks last September, Minister for Finance Michael Noonan changed his growth forecast for the economy three times.

It was a testament to the accelerating nature of Ireland’ s recovery that even those in the engine room were struggling to determine its exact velocity.

His final prediction of 4.7 per cent – upon which the Government based October’s budget – still fell shy of the actual rate, which came in at 4.8 per cent.

After a prolonged slump, the Republic could lay claim to being the fastest-growing economy in Europe, even if cash- strapped households remained on a recessionary footing. Exports have been the primary driver of this turnaround.

What is most striking about our headline trade numbers is just how robust they have been in the face of unprecedented turmoil – in contrast to the carnage being played out on the ground. In 2007, when the iceberg warnings were sounding, Ireland’s total goods exports amounted to €89.2 billion. Four years later in 2011, amid spiralling unemployment and collapsing tax revenues, they had risen to €91.2 billion.

In 2014, with recovery gathering pace, goods exports came in at €89.2 billion.

The fall-off between 2011 and last year was down to a once-off contraction in goods exports in 2013, equating to about €4.7 billion, which dragged goods exports down from €91.7 billion to €87 billion.

This is almost entirely explained by the expiry of patents in the pharma sector – the so-called patent cliff – an event that could not have been avoided. The pharma industry here accounts for nearly 60 per cent of goods exports, which equates to €4 billion of the €7 billion in merchandise leaving the State every month.

It should be noted the figures do not cover service exports, which include Ireland’s massive IT sector and account for about half of our export trade, as a breakdown of the data for 2014 is not yet available.

The disjuncture between surging gross domestic product (GDP) and anaemic household consumption, perhaps the most defining feature of Ireland’s recovery so far, reflects the relatively low employment footprint of the pharma industry here. Despite accounting for €50 billion in exports, it only employs 10,000 people, relatively small when compared to the 200,000 employed in retail.

Several commentators, including the International Monetary Fund, have cast doubt on Ireland's GDP growth, claiming it is being artificially inflated by "contract manufacturing" in the pharma sector.

This sort of manufacturing occurs when Irish-based firms engage companies abroad to manufacture products on their behalf. The Central Statistics Office (CSO) recently issued an explainer, claiming the practice was not a "particularly significant" factor in last year's growth, although this assertion is disputed in some quarters.

Of the €89.2 billion goods exported last year, chemicals and related products, which include pharmaceuticals, accounted for 58 per cent or €51.5 billion of the total.

Within this category, exports of medical and pharmaceutical products increased by €973 million (+5 per cent) to €22.2 billion in 2014, as new drug lines began replacing the ones that have come off patent.

“Miscellaneous”

The next biggest export category was “miscellaneous manufactured articles”, which covers things like scientific equipment and medical devices and accounted for €11.3 billion.

This was followed by exports of machinery and transport equipment, which accounted for €10 billion, and exports of food and live animals, which amounted to €9.3 billion. The food sector has been the star export performer in recent years, jumping from just under €7 billion in 2010 to €9.3 billion in 2014, a 32 per cent increase.

The sector has also clocked up some noticeable victories of late, regaining access to the US and Chinese beef markets.

However, food exports are probably most vulnerable to the proposed free trade agreement between the EU and the United States, which may result in cheaper US produce flooding into Europe.

In 2014, Ireland's main export market was once again the US, accounting for nearly €20 billion, or 22 per cent of total exports, nearly double the next most significant country, which was Britain (€11.8 billion or 13 per cent), then Belgium (also €11.8 billion or 13 per cent) and Germany (€5.8 billion or 7 per cent). The US, Britain, Belgium and Germany accounted for 55 per cent of the value of total goods exports.

The inclusion of Belgium in the top three export destinations is explained by the fact that Antwerp is one of the world's largest drug redistribution centres and receives most of our non-US pharma exports. Last year, it took in €10.2 billion of chemical exports from Ireland and was eclipsed only by the US, which imported €12.7 billion.

Exports to North

Another noteworthy feature of the figures is how much the Republic relies on exports to the North, with the latter appearing as a top four destination in several of the CSO’s 10 export categories, including food, beverages, animal oils and manufactured goods.

The North even ranks ahead of China as an export destination, taking in €1.6 billion of goods annually, ahead of Beijing's €1.5 billion.

With all the talk about tapping into the Chinese market, Britain still ranks as Ireland’s main food export destination and by some way, accounting for nearly 40 per cent of all food exports. One noticeable trend has been a drop in overall goods exports to Europe, which fell from €52 billion in 2010 to €48.8 billion in 2014.

Most observers have blamed this on a slowdown in the euro zone but the figures show a reduction in trade to the UK was more responsible, with exports to the UK declining by €623 million while exports to the rest of the EU fell by just €141 million.

From Ireland's perspective, this dip has been offset by a pick-up in exports to the rest of the world, which rose from €18.3 billion to €19.8 billion between 2013 and 2014, with a greater push in dairy exports to Asia, Africa and Middle East.

"The potential for headline trade data to be distorted by idiosyncrasies linked to the large multinational sector cannot be overestimated, " says chief economist with Investec Philip O'Sullivan. "You really have to drill down to the individual commodity groups to get a proper appreciation of the trends across the different sectors of the economy.

“While headline nominal merchandise exports rose 15.5 per cent year-on-year in the first two months of 2015, the details for the 10 separate commodity groups show a mixed performance, with only five recording growth compared to the same period last year.”

O’Sullivan says the multinational-dominated chemicals sector alone was responsible for about four-fifths of total year-to- date growth in nominal merchandise exports.

“However, we do see encouraging signs in a number of areas where indigenous firms are more prevalent, including beverages (up 16 per cent year-on-year), miscellaneous manufactured articles (up 14 per cent year-on-year) and machinery and transport equipment (up 11 per cent year-on-year).”

A string of recent purchasing managers’ indexes, collated by Investec have repeatedly identified the UK and US as important sources of demand for Irish-based firms.

Apart from the robust growth in both these countries, the strength of their respective currencies relative to the euro has undoubtedly enhanced the competitiveness of Irish exports.

Gross domestic product

According to

David Duffy

of the Economic and Social Research Institute, about 2.25 percentage points of last year’s 4.8 per cent expansion in gross domestic product resulted from net trade.

“Generally what we’ve seen over the period of the crisis is that any growth in the economy up to 2014 came from net trade – with the domestic economy contracting.”

He also said that in the face of a very weak and contracting domestic economy, a lot of previously non-exporting companies started to look abroad for customers – a development which also enhanced the State’s trade balance.

The noticeable pick-up in domestic demand last year – the first since the crisis took hold in 2008 – has been paralleled by a modest contraction in the State’s trade surplus. This relates in part to an increase in imports of metals and machinery which bodes well for domestic investment. However, it also reflects strong car sales, typically referred to as bad imports as they do not go towards furthering domestic output, at least directly.

The State’s trade figures show the hardship foisted on Ireland by the financial crisis could have been catastrophically worse had it not been for our export trade.

It is also questionable whether the Government’s marathon austerity project could have been completed without the cushion of exports, which appear to have kept the engine running when the domestic economy stalled.

How the other half exports: Services driven by US FDI

Goods exports only tell half the story of Ireland’s phenomenal export boom. Service exports, which have been driven by a surge in US-led foreign direct investment over the past decade, account for the other half.

In 2014, service exports amounted to €100.9 billion, nearly €12 billion more than merchandise exports. Unfortunately a breakdown of the various components has not yet been compiled by the Central Statistic Office (CSO).

2013 was the first year on record, however, that the value of services exports eclipsed that of goods exports, a feature that continued into 2014.

Computer services, which include output from tech giants like Google and Facebook, accounted for 42 per cent, or €39 billion, of service exports in 2013, making it the largest service export category.

The second biggest sector was the “other business” category, which includes aircraft leasing as well as research and development and accounted for 22 per cent or €20.5 billion of the total.

The chief destination was Europe, including the UK, which took in 63 per cent, or €58 billion of the total.

The US accounted for 9.3 per cent, or €8.6 billion, while the rest of the world accounted for nearly 28 per cent, or €25.5 billion.