Weak euro will help economic recovery

Foreign exchange markets are always characterised by a certain degree of volatility and tend to be pushed about the place by short-term economic and political developments. 

For companies with exchange rate exposure, currency movements can cause extreme difficulty, not least because currencies are by far the most difficult asset class to forecast with any degree of accuracy. Uncertainty is about the most appropriate word to describe currency markets, which creates serious risks for companies that trade outside their own currency area.

Volatility is one thing, but what we have seen evolve in currency markets over recent months, and particularly over the past couple of weeks, is truly dramatic. It cannot be described as volatility, but rather as the emergence of a compelling trend.

The euro has fallen heavily in value against all of the major currencies and this trend does not look as if it is about to be arrested anytime soon. For Irish exporters to regions outside the eurozone, this is a helpful trend.

Ireland exports just under 36% of its merchandise or goods trade into the rest of the eurozone, meaning 64% goes to other currency blocs. The weakness of the currency gives those exporters a welcome competitiveness boost.

Over the past year the euro has lost 24% of its value against the dollar and over 16% against sterling. The UK accounts for 15.1% and the US for 22.2% of our merchandise trade, so these currency movements are very helpful for exporters to those two important markets. It is particularly important for the indigenous food and live animal sector, 38% of whose exports go to Britain.

The downside of recent currency movements is of course that imports become more expensive, and in value terms, Ireland does import more goods from the UK than it exports. In 2014, merchandise imports from our nearest neighbour totalled €17.3bn (32.2% of total merchandise imports) and exports totalled €13.4bn.

Hopefully, more expensive imports from the UK, of which food is an important component, will switch to domestic products and thus boost the economy.

The weakness against the dollar will add to imported oil costs and this is already taking away a large part of the bonanza that briefly appeared on the back of global trends in oil prices.

On balance, recent currency movements are very positive for the Irish economy and should help sustain and build upon the strong momentum the economy developed during 2014. Yesterday, we got official growth data for the final quarter of the year.

In that three-month spell, GDP showed annual growth of 4.1% and GNP expanded by 6.3%. For 2014 as a whole, we now know that GDP expanded by 4.8%; GNP expanded by 5.2%; exports of goods and services expanded by 12.6%; gross domestic fixed capital formation expanded by 11.3%; and consumer expenditure expanded by 1.1%.

These are strong growth numbers by any stretch of the imagination and, most importantly, they confirm that the recovery is becoming more broadly based.

Every broad sector of the economy made a positive contribution to the growth performance last year, with industry; construction; distribution, transport and communications; public administration; agriculture, and ‘other services’ all recording positive growth. This is the first time this has happened since the crisis commenced in 2008.

Within the overall growth performance, consumer spending is still the weakest component. This creates a political imperative for Government to focus on easing the financial burden on the personal sector.

Yesterday’s growth numbers for 2014 and the obvious evidence that the positive momentum has carried over to 2015 will provide the wherewithal for Finance Minister Michael Noonan to deliver another pro-tax payer budget in October.

As the growth continues to gather momentum, it will help solve many of the very obvious challenges that are still facing us as a country and as a society.

If the fruits of solidly based growth are used properly, Ireland can still have a bright future. The naysayers will not be happy. Now is not the time to reverse course on economic policy.


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