Thursday, January 19, 2012

19/1/2012: Irish External Trade data - November 2011

Latest trade stats for Ireland are out - covering preliminary figures for November - and... it's another record trade surplus. I recently wrote about this issue for PressEurop (link here) and for Globe & Mail (link here).

But the latest data from Ireland's external trade side is truly impressive. Until that is, you dig slightly below the surface... where some strange things are starting to pop up.

Let's take it from the top.

On seasonally adjusted basis,

  • Irish merchandise imports in November stood at €3,706mln, a decline of 5.97% mom that comes on foot of a previous monthly rise of 2.68%. Imports are up 4.91% year on year and relative to 2009 they are up 0.21%. In the 11 months from January 2011, imports are up 6.46% on same period in 2010.
  • Imports increases are, of course, closely linked to increases in exports - as MNCs import much of their inputs into production from abroad. I shall cover this in a second, so keep this in mind.
  • Irish merchandise exports rose in November to €8,016mln - an uplift of 4.58% mom on the foot of the previous month decline of 4.32%. Year on year exports are up 8.83% and relative to November 2009 they are up 23.22%. In the 11 months through November, cumulative exports rose 4.09% relative to the same period 2010.
  • As the result, trade balance (again, referencing just merchandise trade) rose 15.74% mom (after contracting 10.75% in October, mom) to an all-time record of €4,310mln. The trade surplus is now 12.44 ahead of November 2010 and 53.5% ahead of same period 2009. In the first 11 months of 2011 trade balance rose 1.61% on the same period of 2010.
  • The last observation in the previous bullet point is not a strong reason to cheer. Remember, comparable rise in 2009-2010 period was 8.77% or some 5.5 times faster than in 2011.

  • Updating annualized trade stats based on 11 months performance, we can expect imports to come at ca €48.46bn - up 5.82% yoy reversing average annual rate of decline of 9.85% achieved in 2007-2010 period. Exports are likely to post another record year, consistent with my predictions before, at €92.25bn - up 3.36% yoy and well behind the Government-projected rate of over 5%. Trade surplus (for merchandise trade) is likely to reach a record €43.78bn some 0.75% ahead of 2010 result - an increase that would pale in comparison with 10.6% rise in annual surplus in 2010 yoy and well below the average 19.62% increase achieved over 2007-2010 period.

So what is going on, folks? Why are we seeing record surpluses, against fairly impressive exports and growing imports? The answer can be found in two stats. The first one, relates to terms of trade, and the second one relates to transfer pricing. let's take a look, shall, we?

CSO reports terms of trade data with 1 month lag, so we do not have November results yet, but we do have october figures.
As you can see from the above chart, terms of trade improved (downward movement in series) in october for Irish exporters. And this improvement is rather dramatic both in the short-term and in the long-run. However, as the chart below shows, the improvement in terms of trade in October 2011 relative to October 2010 was not fully utilized by the exporters (we are below the long term relationship, implying that for current levels of terms of trade, our exports should be higher than they are).

What did, however, take place is a massive jump - to a record high - in overall ratio of exports to imports in merchandise trade (chart below). In more layman's terms, all of a sudden, in November, Irish exporters needed less imported materials to supply more of exports. Hmmm... Has the chemicals component of Viagra pill change? Not really. Has the value of this component become cheaper for Irish operations of the respective MNC? No. In fact it became more expensive as the euro weakened against other currencies and terms of trade improved. So what did happen?
Take another look:
 What the above suggests is that Ireland-based MNCs are:

  1. Drawing down inventories to boost exports - something they would do were they planning for a slowdown in December and onward;
  2. Pushing up the component of exports value that is transfer pricing, thus boosting their profit side - something that will eventually show up in wider GDP/GNP gap;
  3. Both of the above.

This is not exactly the stuff the dreams of 'exports-led recovery' should be made of, but for now, let us rejoice that at least in one area we have really strong performance in this economy. Afterall, better that than nothing.
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