Economy needs exports to stage recovery

Last Thursday, the CSO published its first estimates of how the economy performed in the opening quarter of this year, as well as revisions to GDP for recent years.

The British National Statistics Office also published similar data for the UK economy.

The headlines from the news agencies told the story. Revisions to GDP data showed that the Irish economy went back into recession in the second half of last year. Meanwhile, the so-called double-dip recession in the UK in 2012 had been revised away.

Earlier in the year, all the talk was of a triple-dip recession in the UK and an Irish recovery.

Now it is a double-dip Irish recession and a recovery in the UK. With these data, though, it is important to look at medium-term trends to see what exactly is going on.

In the UK, it is straightforward enough. The economy was flat over the course of 2012, with a moderate pick-up in activity taking hold in the first half of this year.

The Irish story is a bit more complex. Essentially a sharp fall-off in export growth has seen the economic recovery stall in the past 18 months, even though the domestic economy is showing signs of stabilisation.

The latest data show Irish GDP growth was higher than originally reported for 2011 at 2.2%, up from the previous estimate of 1.4% and the initial estimate of 0.7%.

This shows how much these data can be revised. With little change to the absolute level of GDP in 2012, the higher base for 2011 meant there was a significant downward revision to GDP growth last year, from 0.9% to 0.2%.

Thus, after a marked pick-up in growth in 2011, the recovery stalled last year. The reason for this was a sharp slowdown in export growth, from 5.4% in 2011 to just 1.6% last year.

Two factors are at work here. First, a marked fall in exports from the pharmaceutical sector following the expiry of patents on key products made here.

Second, the EU economy, which takes two-thirds of Irish exports, went back into recession last year.

These two negative factors remained in place in the opening quarter of this year. As a result, goods exports, which are dominated by the pharmaceutical sector, were down by almost 10% on levels in the corresponding periods last year.

Meanwhile, year-on-year growth in service exports slowed to just 1.3% in the first quarter of 2013, down from 9.4% a year earlier.

Exports are an enormous part of our economy. Their weakness has had a very negative impact on GDP growth, returning the economy to recession since mid-2012. However, the data also show that, on a GNP basis, the economy continues to grow.

GNP takes income flows into consideration and the fall in exports has been offset by lower profit repatriations by multinationals.

Finally, at first glance, national accounts data suggest the domestic sector remains in deep recession. It contracted in both the final quarter of last year and opening quarter of 2013, leaving domestic spending down 2.3% year-on-year.

However, when one strips out the highly volatile investment in aircraft componentS, which has little to do with the domestic economy but reflects the presence of a large aircraft leasing industry here, the figures show the domestic economy largely stabilised over the past year, with output unchanged on a year-on-year basis.

Overall exports need to strengthen again for the recovery in the economy to gain traction. The omens are promising, with signs of an improvement in the European and global economy, as well as some pick-up in output from the pharmaceutical sector recently.

While 2013 will be another year of weak growth here, the pace of activity should pick up thereafter.


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