Sunday, 26 September 2010

Reading the fine print in export figures

Michael Taft: There was some cheer when the goods export figures were released on Friday. The Irish Times’ was positively bullish: ‘Strong growth in exports signals continuing recovery’.

But, like a contract that reads too good to be true, it is always helpful to read the fine print or, in the case of goods exports, the detailed tables.

On the surface, it certainly does look positive. The value of exports rose, from a low in December last year, by €1.85 billion, or nearly 32 percent up to June this year. This, along with service exports, is what is driving our GDP (even in the recent 2nd quarterly National Accounts, which saw a seasonable dip in real GDP, total exports rose by 7.6 percent over the 1st quarter).

There is a problem, however. This export growth is completely lop-sided. Exports from the Chemical sector made up 88.7 percent of the net increase. The value of exports rose, from December to June by:

Chemicals / Pharmaceuticals: 58.2 percent
All Sectors excluding Chem/Pharm: 6.9 percent

Our manufacturing exports – and, so, our GDP - is being driven largely by one sector only.

This may not be a problem (and there’s always a problem in over-relying on one sector for growth) given that other indicators are impacted positively, namely employment. If history is any guide, however, the impact will be negligible.

Between 2000 and 2007, Chem/Pharm exports increased by nearly €16 billion, or nearly 60 percent. However, employment remained static, rising by just 300. While there might be some short-term bump from increased Chem/Pharm exports, in the medium-term we shouldn’t expect a significant job increase in this capital-intensive sector.

Again, this might not be a problem if there was a strong linkage between increased production and exports, and domestic firms sourcing into the sector. As production is ramped up to meet new export orders, the Chem/Pharm sector will be purchasing more goods, or inputs, to create their products.

The problem is that there is almost no linkage between the Chem/Pharm sector and the rest of the economy. 85 percent of inputs in the Chem/Pharm sector are imported. In other words, increased exports may create jobs downstream – but in other countries, not in Ireland.

We should be grateful that exports sectors are growing (better than contracting). But we should also be mindful of the details, the sectors and the larger economic impact. Even the Department of Finance has accepted that GDP driven by net export growth will not be tax-rich. If it is located in capital-intensive sectors which import most of their inputs, it won’t be job-rich either.

But there’s one more brain-twister. If the composition of the current export growth will have only a limited impact on the economy, we still have to ask: to what extent is even that growth real or fictional?

I’ll follow up that question in the next post.

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