Friday, December 24, 2010

Economics 24/12/10: Ireland's Trade Balance

With a slight delay, here is a deeper look into Ireland's trade performance through October.

First - exports and imports in levels:
Notice first that Imports are following steeply down-trending line, while Exports are trending flat and even slightly down over 2007-to-date period. Encouragingly, since May 2010, Exports are managing to stay well above their longer term trend line.

Summarized in the tables below, monthly and annual figures show clearly that significant gains in the trade balance are driven primarily by the continued declines in imports.


Hence, trade balance gains - impressive at +7.46% month on month and 11.95% in year on year terms:

At the same time, strong performance in Trade Balance is coming against the tide of adverse changes in the terms of trade: September marked the 4th consecutive month of deteriorating terms of trade, with a fall of 0.7% on August. Overall, since May 2010 terms of trade
have fallen by a cumulative 5.11% through September 2010. We can now expect this process to continue through October-November and cumulative May-October loss in terms of trade to rise to 5.9-6%.

It is worth taking a closer look at the relationships between trade balance components and terms of trade over the 2007-2010 period.
There is no statistical relationship between the level of exports and the terms of trade over 2007-2010 (through October). The relationship stands at y = 0.0175x + 7257.1, R2 = 1E-08. There is a relativeley weak, but strengthening relationship between trade balance and the terms of trade (as reflected in levels). In 2007-2009 data, terms of trade were able to explain roughly 0.32% of variation in the Trade Balance (y = 14.215x + 1385.2; R2 = 0.0032). Including data through October 2010 provides for much stronger explanatory power of 12.3% (y = 90.668x - 4989.4; R2 = 0.1228).

As chart below shows,
correlation between levels of exports and imports has reversed sign in 10 months through October 2010 (to – 0.1458) compared with the first 10 months of 2009 (+0.3264). In longer terms, 2007-May 2010 data implied relationship between the levels of exports and imports was: y = 0.3266x + 5726.9; with a strong R2 = 0.2171. Adding data through October 2010: y = 0.1953x + 6398.5 and lower R2 = 0.0802.
Looking at the annual data:
Using annual data for 1990-2010 (where 2010 is my forecast values) we have weak relationships between growth rates in imports, exports and trade balance as a function of terms of trade changes. My full year 2010 forecasts are: Imports value €43,506mln, Exports value €85,209mln and Trade Balance of €41,703mln. This represents a forecast of 3.4% drop year on year in imports, 2.02% rise in exports and a jump of 8.4% in trade balance.

All of this data clearly suggests accelerated process of transfer pricing by profit-generative MNCs during the 2010 period. In fact, looking at log-relationships, growth in the trade balance is currently being explained by faster shrinking imports than the changes in exports. Coupled with deteriorating terms of trade, we have strong suggestion that our trade performance is being sustained primarily by the MNCs driving through strong expansion of profit-booking transfer pricing.
Of course, one should remember that whether due to transfer pricing or organic exports growth or - as indeed is the case, both - the improving Trade Balance is about the only positive news we can count on in 2010.
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