Soaring euro hits exporters hard

ANALYSIS: Dollar weakness means fewer jobs and slower growth lie ahead, writes Cliff Taylor, Economics Editor

For some months now, many Irish businesses have been looking at the euro's rise and keeping their fingers crossed that it would soon peter out.

But the euro just keeps on going - or perhaps more accurately money keeps flowing out of the US dollar - and the implications for exports and growth this year now look likely to be quite serious.

The euro's strength makes life harder for exporters as they must either accept lower profit margins or persuade their customers to live with higher prices. Given the disinflationary trend worldwide, particularly for firms that are sub-suppliers to UK manufacturers, the option of raising prices is seldom available, meaning that profit margins must be cut.

For example, a company selling £100 sterling (€138.3) of goods into the UK would have converted the revenue back into €166 two years ago.

By a year ago the same £100 sterling had edged down to €156. Now, unless a price rise has been pushed through, it is worth €138.

High trade dependence on the UK, which took 23 per cent of exports last year, and the US, which took 18 per cent, means the economy is exposed when the euro rises.

Looking at overall trade patterns, the Central Bank compiles an index - the nominal trade-weighted exchange rate - designed to measure the value of the euro adjusted for Ireland's trade patterns. This index has now risen by around 11 per cent over the past year, representing, in the words of Mr Robbie Kelleher, head of research at Davy stockbrokers, "a very sharp turn of the screw" for many firms.

Precisely what this will mean in terms of economic growth and jobs this year is difficult to estimate, but it will inevitably mean slower growth and fewer jobs.

Davy, for long the leading "bear" on the Irish economy, is revising its forecasts and expects its GNP growth forecast to fall from 1.5 per cent to "zero, or as close to zero as makes no difference".

Mr Kelleher says that as well as exporters selling outside the euro area, the appreciation of the currency will also lead to problems for companies competing against UK firms in the home market.

Other forecasters would take a more sanguine view of the likely impact growth this year.

Mr Dermot O'Brien, chief economist at NCB, says that firms importing from non-euro areas - such as many of the multinationals - will benefit from lower costs.

Dollar weakness would also help the US economy, which could act to boost global demand and growth, he says.

But indigenous firms exporting to the UK would be hit, he says, as their costs will mainly be in euros and their receipts in sterling.

On balance, while leading to lower inflation and falling interest rates, the rising value of the euro is likely to depress growth this year.

The Economic and Social Research Institute has generally worked on an estimate that a 10 per cent currency appreciation would knock 0.5 of a percentage point off GNP growth.

ESRI economist Mr Danny McCoy says its view has generally been that an equilibrium value for the euro would be in the $1.15-$1.20 range, although the pace of the latest euro rise was unexpected.

The risk now is that even if the ESRI estimate of a "fair" value is correct, history shows that currencies can overshoot by considerable margins and for prolonged periods of time.

If the euro were to shoot up further, the speed and extent of its rise would only intensify the difficulties for exporters.