Monday, March 26, 2012

26/3/2012: QNA Q4 2011 - Part 6

In the first post on QNA results for 2011 I covered data for annual GDP and GNP in constant prices terms. The second post focused on GDP/GNP gap and the cost of the ongoing Great Recession on the potential GDP and GNP. The third post focused on quarterly sectoral decomposition of GDP and GNP in constant prices terms. And a short digression from QNA results here showed how difficult it is, really, to reach any consensus on some of Ireland's economic performance parameters. Following these, Part 4 of QNA analysis focused on nominal (current prices) quarterly data. Part 5 of the analysis focused on decline in capital investment in Ireland during the crisis.

In this, last, post onQNA results for 2011, I will focus on the idea of the 'exports-led' recovery.



We are all familiar with the thesis that exports will drive this economy out of the recession. This has been the leitmotif of the Irish Governments since 2008 and it remains to be the core conjecture still. And there are some reasonable logical grounds for believing this proposition:

  • In real terms, Irish exports of goods and services have posted a spectacular run up since the beginning of the Crisis, rising from €142.03bn in 2006 to €161.47bn in 2011. Year on year exports grew 4.11% in 2011 and that follows on 6.31% growth in 2010.Compared to 2007 total exports in constatant prices terms stood at €7,491mln higher (an uplift of 4.86%). This increase can be broken into €4,987 million uplift in exports of services and €2,504 mln uplift in exports of goods.
  • Adding to the strength of exports impact on GDP and GNP, imports collapsed. Total imports fell to €123.45bn in 2011, down 0.7% yoy after rising 2.7% in 2010. Imports of goods and services are now down 10.23% on 2007 levels - a saving, in terms of national accounts - of €14,075mln on 2007 (broken down to a reduction in goods imports of €19,623mln and increase of €5,549mln in services imports).
  • Trade balance has been going from strength to strength on the back of divergent swings in exports and imports. In 2011 our trade balance was €38,027mln in real terms (composed of €41,671mln surplus on goods side and a deficit of €3,644mln on services side). This is more than three times the trade surplus achieved in 2006 and is 131% ahead of the 2007 levels of trade surplus. Compared to 2007, our trade surplus is now €21,566 mln higher (composed of an increase in trade surplus on goods side of €22,127mln and a deterioration in trade deficit on services side of €562mln).
Alas, of course, as noted in the previous posts, much of these surpluses and exports are due to transfer pricing and outflows of factor payments to the rest of the world have been rampant. Net factor income (in constant prices terms) outflows to the rest of the world from Ireland have reached €33,824mln in 2011, up 18.62% on 2007 levels.

In reality, of course, whatever one says about trade performance, international trade, once we net out imports of intermediate inputs into exports production and transfers abroad as a payment of profits by the multinationals, is by far not as huge as the Government would love to claim. And international trade-supported employment is also relatively small. Pair that with the fact that our economy had experienced a massive collapse of domestic activity and you get the picture: there will be no recovery from the crisis unless domestic economy regains growth momentum.

But here's a more worrisome picture, folks:


It turns out that there is zero statistical relationship between levels of exports and GDP and GNP growth, while there is (as a check on data) strong relationship between exports and imports. More worryingly: higher exports are associated with lower GDP and GNP (albeit there is no, as I said, statistical significance).

How can that be, you ask? Simples: if you think of it, higher exports are delivered primarily by the MNCs operating in Ireland. And during the crisis this delivery has been associated with:
  • Virtually no net jobs creation and falling earnings (IDA brags about the latter as a 'positive' sign of improved competitiveness) - which means that employment & personal spending & household investment effects of record exports is negligible (if not negative)
  • Virtually no new investment (or at least not enough new FDI to offset massive collapse in investment described in the previous post) - which means that gross fixed capital formation part of GDP and GNP is out as well
  • Massive profits repatriation and transfer pricing - which means that Irish economy has only a tiny (less than corporate tax rate-sized) claim on these record exports (corporate tax revenues are not booming, are they?)
Where would the huge links between economic well-being and exports, required to compensate for steep declines in domestic spending and investment activities, come from, then?

Now, don't take me wrong - exports do provide huge support for our economy and real benefits and jobs. I wrote about this time and again. But these are not nearly enough to keep this economy afloat. What Ireland needs to get out of this mess are - very broadly speaking - two sets of outcomes:
  1. Most important short-term - restoration of domestic economic activity (especially starting with domestic investment)
  2. Most important longer-term - diversification of our exports base away from the MNCs toward domestic exporters.
In both - Irish policies are currently failing us and record-busting exports as we know them today are not providing the rescue vehicle we require.

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