Contract manufacturing inflated Ireland’s trade figures massively last year in swelling sector growth far above actual levels, according to Davy Stockbrokers.
The practice, which sees manufacturing co-ordinated by Irish-based firms but which takes place elsewhere being booked on Irish national accounts, came into focus last year with the Financial Advisory Council indicating it accounted for more than 40% of GDP growth in the first half of the year.
Headline growth figures showed that Irish exports grew by 12.2% in 2014.
Excluding contract manufacturing, however, goods export values increased by just 2.9% while service sector exports climbed by 8%.
While the actual figures represent a strong recovery, nonetheless they also illustrate the degree to which contract manufacturing has inflated the headline figures, according to chief economist at Davy, Conall Mac Coille.
“Ireland’s trade figures in 2014 have been massively distorted by contract manufacturing,” said Mr Mac Coille. “At face value, Irish exports grew by 12.2% in 2014. However, underlying performance was much weaker. Goods export volumes excluding contract manufacturing grew by 2.9% in 2014, still a decent pace of growth after the sharp 4.9% contraction in 2013.”
A report penned by Davy’s economist also warns of the possible negative effects of a weak construction sector.
While the relatively small size of the country’s construction sector should ensure that GDP growth is not adversely affected by the performance of the industry, a lack of development could create bottlenecks that could significantly hamper economic progress in other sectors.
A slowdown, attributed to new building regulations that are stifling construction activity coupled with planning constraints, has been concentrated in housing and commercial activity.
The potential bottlenecks arising from the slowdown include hampering the country’s attractiveness for foreign direct investment as there is now a clear shortage not only of residential property but also prime office space in the capital.
Overall, however, the outturn for 2014 bodes well for growth this year, the report finds.
Consumer spending — although still quite weak relative to GDP growth— and the more domestically oriented services sector have joined in the economic pick-up; broadening recovery outside of the export sector which has driven the economy’s momentum to date.
Furthermore, economic conditions in both the euro area and UK appear to have improved since the beginning of the year.
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