Chinese turmoil will have minimal effect on Ireland, say experts

Trading position here more linked to events in North American and European markets

 Fergal O’Brien: “I don’t think China has slowed to such a degree that it is now a major risk for exporters.”  Photograph: Dara Mac Donaill / THE IRISH TIMES

Fergal O’Brien: “I don’t think China has slowed to such a degree that it is now a major risk for exporters.” Photograph: Dara Mac Donaill / THE IRISH TIMES

 

The risk to Ireland from the ongoing turmoil in China has been classified as “minimal” by several leading Irish commentators.

They say Ireland’s economy is dominated by exports of pharmaceuticals, medical devices and technology services mainly to Europe and North America, which means it has limited exposure to China.

Nonetheless, they acknowledge that if the current crisis morphed into a global downturn, Ireland – a small, open economy – would suffer.

They also suggest that 2016 is likely to be marked by more volatility in currency markets, which would make for an unstable trading environment.

While there is volatility in financial and equity markets, Ibec’s chief economist Fergal O’Brien says it is unclear how much of it relates to “issues in the real economy versus this transition from exceptionally cheap money to more normal times”.

“I don’t think China has slowed to such a degree that it is now a major risk for exporters,” O’Brien says, noting the most recent trade data on China were more positive, both on export and import sides.

Export jump

“Again we’re not seeing evidence – from an Irish business perspective – that consumer-related imports are slowing as China tries to make that transition from government-supported economy to a more consumer-led one.”

He cites a 40 per cent jump in Irish exports of infant formula to China detailed in Bord Bia’s latest Export Performance and Prospects report as evidence of how strong demand still is.

Bord Bia’s figures suggest Irish exports to China grew by 16 per cent last year, driven by increased dairy, pig meat and seafood.

While Ireland’s food and drink trade with China is growing, the bulk of our exports are not in the cyclical sectors, O’Brien says.

Investec’s Philip O’Sullivan, points out less than 2 per cent of Irish exports go to China.

The most up-to-date CSO numbers suggest the value of Ireland’s goods exports, for the first 10 months of last year, was €92.5 billion, with China only accounting for €1.9 billion or 2 per cent.

Similarly, with services, exports in 2015 were valued at €101.7 billion, of which €1.3 billion or 1 per cent went to China.

“So in the short term the direct effect [on Ireland of ongoing turmoil in China] is probably modest,” O’Sullivan says.

“With previous bouts of volatility in the Far East, such the Asian financial crash of the late 1990s, the direct impact on the Irish economy was also pretty muted.”

However, he warns that if short-term volatility were to become more serious, Ireland could be indirectly hit.

One of the main macro-economic themes of 2016, he says, is likely to be monetary policy divergence.

While the US Fed is likely to continue with modest rate increases, there is increasing uncertainty around the Bank of England’s stance, with sterling falling sharply against the dollar in recent weeks.

“Equally, if euro zone growth disappoints again, we’re likely to have more calls on Frankfurt for quantitative easing measures, which could lead to a further appreciation in the dollar against the euro.”

Fresh sell-off

This could prompt a fresh sell-off in emerging market currencies and “this would probably be tied in with another sell- off in commodities”, O’Sullivan says, noting there has been a sharp correlation between the dollar’s rise and collapsing commodity prices.

He believes this sort of global uncertainty could damage Ireland’s interests.

“Ireland is extremely leveraged to international events, much more than other European countries,” he says, noting exports and imports here, as a share of gross domestic product (GDP), come to just over 200 per cent.

Nonetheless, Brian Weber, head of Quilter Cheviot, Ireland, believes the impact here of current market turmoil will be minimal.

“I’m quite cynical about these short-term bouts of volatility. You get this massive amount of volatility driven by short-term trading activity, which, for long-term investors, is actually meaningless.”

He says China is transitioning from an export-led economy to a consumer-driven one, “so there’s a massive slowdown as a result”.

“If you see beyond the short- term noise, however, there is huge opportunity in China, as demand for western-style goods will increase,” Weber adds. As with Brexit, Ireland’s food and drink sector is probably the most at risk from a collapse in demand from China.

Bord Bia’s chief Aidan Cotter says China imports about 6 per cent of Ireland’s food and drink exports, worth €600 million, making it Ireland’s fifth- largest food export market, but second-largest for dairy.

Headwinds

He says Irish exports have held up pretty well in the face of significant headwinds, largely because exporters are pitching to the high end of the market.

Cotter also notes Irish food and drink produce is still under-represented in China, given that it is home to 20 per cent of the world’s population.

He says pork exporters here have managed to replace a significant portion of the lost Russian trade by exploiting new export channels to China.

Beijing is also about to open its doors to Irish beef.

“The word we’re getting back from China is that things are not as gloomy as they’re being portrayed back here.”