ECONOMICS:THIS COLUMN is about future economic growth in Ireland's main export markets. But first, a brief detour. How is Ireland perceived abroad? This is among the questions I have been most frequently asked over the past two years. My perception of others' perceptions is not worth a great deal. Karl Sauvant's views on this country are worth a lot.
He runs an institute that specialises in understanding foreign direct investment (FDI) at New York's Columbia University, one of the world's top-ranking schools. That institute published a rather complimentary report on Ireland yesterday ( see end note for link). Sauvant spent a career at the UN's Conference on Trade and Development where he was the driving force behind its flagship publication, the annual World Investment Report –the bible on FDI facts, figures and analysis. There are not many people who know more about FDI and its dynamics. He also happens to be quite a dour fellow who is not in the habit of flattering.
I asked him yesterday what he thought about Ireland as a place to do business for international companies. This is what he said: “Ireland has a stellar reputation as an investment location and the crisis has not changed that. The principal investment determinants remain in place – excellent infrastructure, high skills and an investment-friendly regulatory framework, combined with a forward- looking investment promotion effort.”
It is reassuring somebody of Sauvant’s stature does not believe the mess we have got ourselves into will harm inward investment.
Now, back to business. Export success depends on two factors – competitiveness at home and demand abroad. This week's detailed forecast of the world's growth prospects by the International Monetary Fund ( see end note) provides a wide-ranging assessment of the latter. Its World Economic Outlookdoes pretty much what it says on the tin. So how does it evaluate future demand in Ireland's most important markets?
Neither this report nor another by the Fund on the stability of the world's financial system, published on Wednesday ( see end note), shies away from the very great risks facing the world economy in general and many developed economies in particular. The failure of finance continues to have serious repercussions. The situation remains fragile.
That important caveat aside, the IMF’s central forecast for the economies that buy most goods and services from Ireland is not at all bad. In order of importance, these are Britain, the US, Germany and France.
Britain is no longer this country’s largest market for goods exports. But, as our home-grown companies still sell half of all their manufactured exports to Britons, and as these businesses tend to be most labour-intensive, the British market remains crucial. It is also by far the biggest market for services exports, now almost as large as goods. In 2008, the last year for which numbers are available, more than €15 billion worth of services was sold to the UK, amounting to 22 per cent of the total.
Good news, then, the IMF believes Britain will be one of the few rich countries to experience an acceleration in economic growth between this year and next. From 1.7 per cent 2010, the IMF expects gross domestic product (GDP) growth to reach 2 per cent 2011. One reason for the more rapid expansion is that aggressive monetary policy action will offset the dampening effects of front-loaded fiscal tightening. This monetary easing, however, may have negative consequences for Irish exporters if – as seems likely – it weakens sterling vis-a-vis the euro.
The US is this country’s largest market for goods exports and, as of 2008, the third-largest for services exports. Its economy is expected by the IMF to grow more strongly than Britain in 2011, at 2.3 per cent, but this represents a slowdown on this year, when it is estimated to expand by 2.6 per cent.
There are also exchange rate risks for Irish exporters because of probable monetary easing by the Federal Reserve. Currency fluctuations with the dollar, however, are less problematic than with sterling as intrafirm trade (transactions between subsidiaries of firms) is much more important in Ireland-US commercial interaction than in that between Ireland and Britain.
Belgium was Ireland’s second-largest market for goods exports last year, when a huge €14.1 billion worth of goods was shipped to the low country. More than 90 per cent of this was chemicals and pharmaceuticals, most of which is likely to be intrafirm trade not destined for consumption in Belgium. Germany is Ireland’s third most important market, with €7 billion in services sold in 2008 and almost €5 billion worth of goods in 2009.
Germany has been the only big developed economy to have experienced anything like a V-shaped recovery. The IMF expects growth of 3.3 per cent this year (more than double the rate expected three months ago) before a slowdown next year, to a more normal 2 per cent. It is among the few big economies where the risks to growth next year are as much on the upside as the downside.
France ranks fourth among our trading partners, importing €10 billion in goods and services annually. It, along with Canada, had the shallowest recession among the G7. Its steady if not spectacular performance is expected to continue – GDP growth of 1.6 per cent is expected both this year and next.
If the IMF’s predictions for the major economies turn out to be correct and if continued competitiveness gains can be made in Ireland, the export side of the economy should continue to flourish.
www.vcc.columbia edu/files/vale/documents/ Ireland_IFDI_FINAL.pdf
www.imf.org/external/pubs/ft/weo/2010/ 02/index.htm
www.imf.org/external/pubs/ft/gfsr/2010/ 02/index.htm
