Volatility could blow any recovery off course

ANALYSIS:The euro-zone debt crisis and US credit-rating woes could hit Irish exports and dent economic growth, writes SIMON CARSWELL,Finance Correspondent

IRELAND MAY not have a central role in the latest economic drama affecting the global stage but the international volatility could radically change the plot lines of the Irish economic recovery story.

The biggest threat from the turmoil stemming from the sovereign debt crisis spreading to Italy and Spain and the US loss of the top AAA credit rating, is the potential effect on Irish exports.

Declining economic growth leads to declining international confidence, making companies more reluctant to invest and consumers less willing to spend.

Exports have been a glimmer of hope for the economy, growing 7 per cent in the first three months of this year. The Central Bank expects them to grow by more than 6 per cent annually in 2011 and 2012. A reduction in the creditworthiness of the US will force its multinationals to pay more for their loans, which may lead companies to reconsider investments abroad. However, a weaker dollar may encourage multinationals to repatriate euro profits back to the US, the Irish Exporters’ Association says.

Exports to the US totalled €25 billion or 15 per cent of Irish exports last year, it says.

Uncertainty will lead to US firms and consumers buying less.

“I would be concerned about overall confidence,” said Barry O’Leary, chief executive of IDA Ireland, which promotes international investment into the country.

“If you look at the US economy and some of the European economies, they are slowing in growth.”

More than 75 per cent of all Irish exports are by multinationals in the technology/communications and life sciences industries, and it was “too early to say” how they would be affected by the turmoil.

However, O’Leary said many US multinationals were holding large reserves of cash and looking to use this to expand.

“If the global economy slips back into recession, Irish exports are going to fall,” said Dermot O’Leary, economist at Goodbody Stockbrokers. “We may relatively outperform other countries but we are trying to meet growth targets so relatives don’t come into it.”

The Government has forecast economic growth of 0.8 per cent in 2011 and 2.5 per cent in 2012 but any significant decline in exports would reduce these estimates. This, in turn, could affect the Government’s target of getting the public finances back to a deficit of 3 per cent of GDP by 2015.

“The slower the economy grows, the more savings you must find,” said Alan McQuaid, chief economist at Bloxham Stockbrokers.

If exports weaken, the Government may have to seek savings well beyond the €3.6 billion envisaged to reduce the deficit to a target of 8.6 per cent this year.

Minister for Finance Michael Noonan hinted at going beyond the €3.6 billion before last week’s upheaval in the markets. This could mean more severe spending cuts and higher taxes.

Another difficulty of the uncertainty caused by $2.5 trillion (€1.7 trillion) being wiped off global stock markets, is that Irish consumers will not want to start spending any time soon. This will also postpone a much-needed boost for the economy.

On the plus side, the turmoil might lead the European Central Bank to freeze planned interest-rate increases, which will take pressure off Irish mortgage holders.

Ireland could also benefit from Europe-wide solutions to ease the sovereign debt crisis, though any ECB buying of Italian bonds to reduce borrowing costs may only ease the crisis temporarily.

Commentators believe an increase in the size of the European Financial Stability Facility to more than €1 trillion from a proposed €440 billion is the least the market expects.

More far-reaching remedies such as EU bonds for debt-laden governments are unlikely given German resistance.