ECONOMICS:Our major trading partners will expand next year but at rates well below potential

VIRTUALLY ALL countries expect to export their way out of the recession but it is by no means clear where the initial impetus will come from.

In a previous column, I looked at the prospects for the euro zone, an area to which we are linked by a common currency and to which 40 per cent of our exports go.

The strength of the upturn there is expected to be muted. More recent European Commission forecasts were disappointing, coming in below the 1 per cent GDP growth rate previously speculated upon.

What then of those countries which account for the remainder of our exports? The two biggies here are the UK and the US, which each take about 20 per cent of Irish exports.

The US economy is traditionally very flexible and, given the massive fiscal and monetary stimulus there, one would expect it to bounce back quickly. Indeed, that is what appears to have happened with third quarter growth posting an impressive 3.5 per cent rate.

However, there are two problems with this. First, it is an annualised rate, ie the actual quarter-on-quarter increase of 0.8 per cent was raised to the power of four to get the annual growth rate that would materialise if the third quarter rate were maintained for the next year.

Second, President Barack Obama’s chief economist pointed out that it was all accounted for by the exceptional government measures and so might be transitory. Even so, forecasts for US growth next year are in the range 2 to 2.5 per cent – twice that of the euro zone.

On the other hand, the UK’s preliminary growth figures for the third quarter were a big disappointment, contracting by 0.4 per cent instead of the return to growth which was confidently expected.

This sparked off a row among economists with some, especially those involved in financial markets, simply refusing to believe the data and predicting that they would be revised upwards in line with the more positive survey evidence of late.

Others are not so sure.

The Bank of England seems to lean towards the latter camp. It marked up its forecasts a bit but said that the strength of the recovery was highly uncertain and that it would take a considerable period for banks to repair their balance sheets.

In the meantime, much will depend on the extent to which borrowers can access alternative sources of finance. Imagine the row there would be here if our central bank said that.

The UK has problems which in many respects are similar to ours. The combined effect of the financial crisis and the recession has been to generate a budget deficit the likes of which has not been seen since the second World War.

The deficit was boosted by the expansionary fiscal policy adopted, including lower VAT rates which do not seem to have been effective. The result is that the UK has budget deficits that are as high, if not higher, than our own. The rowing back on this begins next year when VAT will be restored to former levels.

The Bank of England envisages growth of about 2 per cent in 2010 but this does not allow for any significant fiscal correction. The European Commission puts it at half that.

In short, our major trading partners will expand next year but are likely to do so at rates well below potential. This, in turn, means that their external demand will be weak, curbing the potential for us to sell to them.

We have to wait until 2011 for a better trading picture. Current tentative forecasts for 2011 envisage a recovery in trade to growth rates that are, perhaps, half those we were used to before the collapse.

All of this does not sit easily with the recent performance of Irish exports which has been surprisingly buoyant. Amazingly, the volume of exports contracted by only 3.5 per cent in 2009, a quarter of the EU average. The UK and the US each recorded double digit declines.

The better Irish performance was largely due to chemicals and pharmaceuticals – when it came to traditional industries the story was different. It will be recalled that surges in multinational exports have little impact on the economy given that they tend not to generate additional employment and the profits tend to be repatriated.

Irish exports to the non-euro area have suffered from the twin defects of a domestic cost base which had got out of hand and a sharp appreciation of the euro.

The rise in the euro-dollar rate does not matter so much given that many multinational exports are priced in dollars.

However, exporters to Britain are clearly feeling the pinch with volumes down 14 per cent this year. Weak sterling is a major factor with the euro-sterling rate up a third from 66p to 90p.

Having got this wrong over the past year, financial market economists are still hoping for a sterling recovery. The question they need to answer is, why should a country with a weak economy have a strong(er) currency?

Irish exporters have a keen interest in the answer. If sterling does not recover, the reduction in costs and wages required to make them competitive is likely to be a multiple of the 5 per cent average fall envisaged by the OECD in its recent report.

If we do not export, we will not recover.

pmcardle@irishtimes.com