The world economy is outperforming most predictions and Irish exporters have been prime beneficiaries. We are well on the way to exceeding the highest export total on record, writes John Whelan.
Current estimates put total international sales of goods and services at €277bn, which is a €17bn, or 6.7%, increase over 2016.
The strength of the export activity may look like too much of a good thing, with Brexit looming, though less threatening than it was a few weeks ago. However, it will take some analysis to fathom why in the face of a damaging sterling depreciation Irish exporters to the UK managed to push up sales to the market by an enormous 13%.
The calls to reduce our reliance on our nearest neighbour appear to be falling on deaf ears. Enterprise Ireland and Bord Bia have been trying to steer exporters towards other markets on the basis of the bigger risks down the road if we get a hard Brexit.
Many exporters are locked into the UK market and have grown as the market defied critics and continued to robustly grow over the past year. The dog in the street knows that pulling away from good customers is a hard thing to do. Much more worrying is the continued failure to take advantage of the single currency market.
Despite the growth in most European economies throughout the year, Irish exports to the eurozone fell back marginally. On the performance to date, replacing any sizeable portion of our exports to the UK with an increase to mainland Europe seems a pipe dream.
For now, there is cold comfort in having a single European market without the UK being part of it. The predilection to trade with the UK is not surprising as exporters — like the rest of the nation — are, by and large, not polyglots. Which also explains some of the ease with which Irish exporters continue to
expand into the US.
The sweeping tax reforms passed through the Senate and House with surprising speed over the past few months, gave Donald Trump an undeserved Christmas present. The far reaching tax reform is of particular interest to US corporations who trade and invest in Ireland and vice versa, as it swipes down tax in business profits from the current level of 35% to 21%. Goldman Sachs said that the effects of the tax changes are likely to be modest, giving a boost of less than 1% to the economy over the next two years.
However, any boost is good news as the US is the largest market for Irish goods exports and our second largest market for services exports such as computer services. However, PwC’s Irish office has a cautionary view on continuity of foreign direct investment; saying “any fundamental changes
to the US tax system could have implications for US foreign direct investment in Ireland and the Irish economy as a whole.’’
Despite the language difficulties and the distance to market — two of the main reasons given for not entering foreign markets — exports to China powered ahead to €4.2bn in goods and a similar amount in services in the year. The two main drivers of the growth were dairy products, particularly infant formula and aircraft leasing, driven by the growing number of Chinese banking corporations investing in Irish-based aircraft leasing firms.
Avolon, started by Co Clare man Domhnal Slattery, is a standout example. With Chinese backing it is now the third largest aircraft lessor in the world. Exports to the rest of the world are a mixed bag, with no great indicator of expansion by Irish exporters into emerging markets in evidence. Exports of goods to outside the main markets mentioned above were down by over 10% through the year, while services exports are skewed to tax havens such as Bermuda and central American states.
The strength in global growth is broad-based across most countries and is forecast by the World Trade Organisation and the World Bank to continue into 2018 and beyond. Easy financial conditions have played a key role in supporting the pick-up in global growth since the middle of 2016, as has low
inflation. This augurs well for Irish exporters despite the potential downside from Brexit.
The biggest risk to this positive global outlook is undoubtedly political. The Trump administration seems hellbent on scrapping international trade agreements based on the political mantra of ‘America First’. The trans-pacific deal was an early casualty. Contractors for the wall across the Mexican border have progressed to creating a series of pilot walls which Trump will inspect and approve in 2018. The Middle East has been thrown into disarray with the US announcement recognising Jerusalem as the capital of Israel.
In Europe, Angela Merkel is struggling to form a government; and Catalan pro-independence parties have held their absolute majority in the December snap regional elections, dealing a severe blow to the Spanish government, which had called the polls in the hope of heading off the independence push by the deposed Catalan president Carles Puigdemont.
The impact of a populist win in the Italian elections in 2018 could be profound. Theresa May’s UK government may not weather another political scandal, with dire consequences for concluding a soft Brexit landing for Irish business. Russia’s prime minister Vladimir Putin, who is more interested in old- style land grabbing by military means than the economic welfare of his citizens, continues to isolate his country with sanctions.
Finally, the escalating tensions around North Korean nuclear ambitions could derail the Asian economic growth, which has been the main driver of global growth over the past decade.
John Whelan is a consultant in Irish and international trade