Ireland likely to benefit from falling value of euro

IRELAND is set to be one of the biggest beneficiaries of the falling value of the euro, according to Goodbody Stockbrokers’ team of economists.

While they point out the reasons for the recent weakness in the euro are troubling, economists Dermot O’Leary and Deirdre Ryan believe the region is set to benefit in terms of improved competitiveness versus those countries outside the eurozone.

“The Irish economy will be one of the largest beneficiaries of the fall in the value of the euro, thus aiding in the goal of achieving an export-led recovery,” Mr O’Leary said.

Goodbody pointed out that Ireland has the largest export base as a percentage of GDP in the euro-area and conceded that, while there is a large input component to these exports (with imports accounting for 73% of GDP), this statistic highlights the degree to which policy has targeted multinational investment over recent decades.

“For goods, Ireland’s single, largest export market is the US (21% of total), with the UK accounting for 16% of total exports. With exports to the US economy comprising of US firms exporting goods back to their home market (which can be priced in dollars in any case), the currency effect of the dollar is likely to be overstated in terms of its effect on demand for exports from Ireland.

“However, the fall in the euro does reduce the cost base in Ireland when converted to dollars, thus impacting positively on competitiveness. For the UK, the effect is a lot cleaner, and, given that the UK market is still the largest for indigenous exporters, the fall in the value of sterling relative to the euro is an unambiguously positive development. These developments come on top of the relative price declines that are being witnessed during the current real devaluation,” Mr O’Leary said.

Goodbody said that these developments come on top of the relative price declines that are being witnessed during the current real devaluation. The ESRI estimates that a 1% improvement in competitiveness adds 0.5% to GDP over the medium-term.

Meanwhile, NCB Stockbrokers are forecasting that Irish GNP will grow on a sequential basis throughout 2010, but because of the carryover effect, expect GNP to contract by -0.5% in 2010. For 2011 they expect GNP to expand by 2.8%.

* Goodbody are now forecasting average exchange rates of $1.25 and $1.20, and £0.85 and £0.85 for 2010 and 2011, respectively.