Eamonn Pitts: Three reasons why economists should be more optimistic

The decline in the price of oil and in the value of the euro and the boost in farm output are good signs.

Commentators are relatively optimistic about the Irish economy this year.

What I do not understand is that they all think the growth rate this year will be less than last year.

For example, the Central Bank Quarterly Bulletin says that GNP grew by 3.9% in 2014, and will grow by 3.3% this year.

The corresponding figures in the latest commentary from Davy Stockbrokers are 4.2% and 2.9%. Bank of Ireland’s are 4.2% and 3.7%.

Many things are coming right about the Irish economy, but these are not sufficiently appreciated by those in banks and stockbroking companies, who are doing the forecasting. I’ll name three.

n The decline in the price of oil, petrol, home-heating oil, etc.

n The decline in the value of the euro, vis a vis the dollar and sterling.

n The likely dramatic increase in farm and food output, which will follow the removal of milk quotas.

Consumers are benefiting from the decline in oil prices. Petrol costs about €1.30 per litre, compared with €1.55 throughout most of 2014, and €1.70 in August, 2013.

That’s a saving of 16% on last year, a real bonus for long-distance commuters.

It is also a bonus for every firm in distribution, where costs are dramatically reduced. Consumers benefit directly also, from an even greater decline in the price of home-heating oil.

Kerosene costs 53 cents per litre this January, compared with 82 and 83 cents in February and June, 2014, down nearly 40%. That leaves extra money in consumers’ pockets for spending on other things, which should increase economic activity.

European economic research institutes (Euroframe, which includes ESRI) suggest growth in the euro area in 2015 could be raised as much as 0.7 percentage points, by lower oil prices (a badly needed boost, where Euroframe predicts only 1.5% growth in 2015, compared to 0.8% in 2014.)

Now, some facts about the euro, the dollar and the pound.

At the time of writing, €1 will buy $1.13.

Throughout most of 2014, it could buy €1.35: in 2013, it could buy €1.30 (see chart).

This is bad news if you plan to holiday in the US, or if your business involves buying goods from the dollar area. Your euro will buy less.

But if you are selling goods or services into a dollar market, it is very good news. You will get more euro for your dollar sales.

You might be able to win a greater share of the market by judiciously cutting your prices.

What economists call the ‘terms of trade’ have moved by 16% in our favour since last October.

There is a similar story with sterling. In February, 2013, a euro bought 86p sterling.

It now buys 73p, a reduction of about 15%.

Bad news if you buy in the sterling area: good news if you sell into it.

Over half that change has occurred in the last six months, and a quarter in the last five weeks.

While this improvement, in the terms of trade, is common to all countries in the euro zone, a much higher proportion of Irish trade is conducted with the dollar and sterling areas compared to any other euro member.

We are in a stronger position to benefit (our imports cost more, however).

Firms in fashion and software should benefit — but I draw particular attention to the tourism and food sectors, which are major employers in rural areas.

Revenue earned from tourists (excluding domestic) is about €4.5bn.

About a third is earned from visitors from mainland Europe, therefore predominantly from the euro area.

The remaining two-thirds comes from sterling and dollar areas, where we now have a price advantage compared with previous years, which ought to increase tourist numbers and tourist expenditure.

Taking a conservative 30% for inputs, we arrive at an estimated direct contribution from the tourist sector of about €3.3bn.

This is about 2% of GNP.

An increase of 10% in tourist revenue this year would amount to about €0.3bn of extra output, or about 0.2% of GNP, without taking into account the multiplier effects.

A big story in this paper in recent weeks is the ending of milk quotas and the plans of farmers to produce more milk, and of the co-ops to process and sell it.

The Food Harvest 2020 targets a 50% increase in supply by 2020.

There are many in the industry who expect the actual increase in milk supplied to be considerably higher — at least 60%.

This process starts in April. One expects that the milk supply this year will increase at least 15%.

Teagasc economists have calculated that a 50% increase in milk supply would lead to 10,000 extra jobs and an increase of €2.5bn in overall national output, including knock-on effects.

So if we got a 15% increase this year, there ought to be an increase in gross domestic product of €0.75bn.

How significant is that?

Well, total national output is about €160bn, and the extra milk ought to add nearly 0.5% in overall national output.

This would have to be modified downwards, if lower prices persist in dairy markets.

But another 0.5% is hugely significant, when the “stockbroker economists” are talking about an increase in total national output of 3%.

But how much lower are dairy markets this year, when account is taken of the depreciation against the dollar?

In the accompanying table, I show the average price attained in the Global Dairy Trade auctions for four major dairy commodities, over the period from May 6 to September 2 last year (nine auctions), expressed in dollars.

I also show the average of the most recent auctions (February 3 and 17).

I have adjusted both prices to euro, at the rates of $1.35 for 2014 and $1.13 for February.

While there is a considerable reduction in cheddar cheese and skim-milk powder prices, prices for whole milk powder are up 11%, and by more than 38% for butter.

So there may not be a dramatic fall in milk prices this year, compared with 2014, particularly when the costs of processing — for drying whole and skim milk powder — are reduced by the 40% decline in fuel prices.



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