Prudence required if exports to resuscitate economy
ECONOMICS: IRELAND IS an exporting laggard and big doses of front-loaded austerity are the best medicine for economies recovering from recession. Either or both of these statements may surprise, but last year’s “rich world” export performance – illustrated in the accompanying graph – suggest both are true.
Start with the austerity story. Latvia, Lithuania and Estonia suffered even deeper depressions than Ireland and even more brutal austerity. Now they are surging ahead.
Estonia’s GDP grew by a blistering 7.6 per cent last year, Latvia’s by 5.5 per cent and Lithuania’s by 5.9 per cent. The three were – by a considerable distance – the fastest growing economies in the developed world.
They are in that enviable position in large part because their exports are doing so well. The three were at the top of the developed world export growth league last year.
Estonia, which adopted the euro on January 1st, 2011, recorded an off-the-chart 25 per cent rate of export growth. Its Baltic neighbours enjoyed double-digit growth, and did so without the benefit of exchange rate depreciation (they have long pegged their currencies to the euro). Latvia, the worst affected of the trio, exited its EU-International Monetary Fund bailout at the end of last year, having regained control of its public finances.
Those who declare with infinite certainty that spending cuts and tax increases cannot work, or that there is no example of an economy cutting its way out of recession should take a closer look at the Baltics.
But that is not to say that austerity guarantees recovery. Look at Greece, which continues to undergo a considerable fiscal consolidation. It posted one of the worst export performances in the developed world last year. And this despite the shrinking of its domestic economy, which might have been expected to enhance competitiveness by reducing domestically-determined input prices.
But even that has not happened and its exports actually fell last year.
If the effects of fiscal stance on economic growth are uncertain, the claim that Ireland is an export laggard was more true, last year at any rate. It would appear that the 25 per cent contraction in domestic demand since 2007 in Ireland has not given the competitiveness boost that might have been expected. Last year, Irish exports were among the slowest-growing in the rich world and, as a result, Ireland is losing world market share.
As the graphic illustrates, Irish export growth of 4 per cent in 2011 put it in 21st place among the EU 27, well below the EU average growth rate of over 6 per cent. But this headline figure masks a difference in performance between services exporters and their goods-making counterparts.
Irish exports are extremely unusual in that almost half are accounted for by services (one-fifth is a more normal share for a developed economy). Last year Ireland’s comparative position in services exports was good, with annual growth of 5 per cent, exceeding the EU average of 4 per cent.
Goods exports, by contrast, did less well. A growth rate of just 3.4 per cent was half the average, putting Ireland in 25th position among the EU 27.
This may cause eyebrows to rise, particularly as analysts at home and abroad tend to laud Ireland’s export sector. A number of factors help reconcile last year’s comparative performance with most analysts’ views on the sector.
First, Irish exports weathered the Great Recession in 2009 better than all other peer economies. Second, after a low point in late 2009, strong export growth was achieved until the middle of last year. Third, the value of export receipts continued to break records last year. Fourth, exports as a percentage of GDP in Ireland are among the highest in the world and the percentage continues to rise. Fifth, the balance of payments with the rest of the world moved back into surplus in 2010 and stayed in surplus (just) last year.
Finally, when measured by the contribution of net exports – exports minus imports – to economic growth, Ireland was much higher up the EU league table.
But that was because Ireland was one of only five EU 27 countries to record a fall in imports last year. A quirk of national accounting means that a fall in imports causes GDP to rise, even if falling imports is not necessarily a good thing.
Ireland has a large and vibrant export sector, but it may be flagging.
An even sharper focus on the competitiveness agenda may be needed if the export engine is to drag the domestic economy off its knees.