Thursday, 11 August 2011

Is Ireland heading into a slowdown, too?

Michael Taft: The global recovery is now expected to ease off in the latter half of this year with a range of data suggesting a slowdown in the manufacturing sectors. This is not good news for Ireland as external demand has been one of the few lights in the recessionary darkness. Exports have held up well during the crisis. However, in line with the global easing, we may find that this section of the economy may not be making the contribution to growth we need to compensate for domestic demand that is still in decline.

The CSO’s recent Industrial Production Index gives some clues. Manufacturing production mirrors goods exports. In 2010 production in the ‘modern’ sector (primarily multi-nationals in the capital intensive sectors such as chemicals/pharmaceuticals) increased by nearly 11 percent in volume, while the ‘traditional’ sector, where indigenous enterprises are strongest, experienced a more sluggish 2 percent increase.

Since December of last year, however, production has been sluggish:

In volume terms there has been little change. When we look at the turnover (or value) index we find as similar small drop-off from December in both the modern and traditional sectors.
The CSO also provides a ‘New Orders’ index which measure trends in new orders accepted in the manufacturing sector, including those received and filled during the last month. Between December 2009 and June 2010, new orders increased by nearly 17 percent, reflecting the strong performance last year. However, for the same period this year, new orders have not increased at all.
For those ‘banking’ on an export-led jobs recovery, it’s not likely to be driven by the goods sector. Looking at the provisional figures for production and employment growth between 2009 1st quarter and 2011 1st quarter we find the following:
• Modern Sector: volume production increased by 6.1 percent but employment fell by 9 percent, shedding over 6,000 jobs
• Traditional Sector: volume production fell back fractionally while employment also fell by 9 percent, shedding over 12,000 jobs in this more labour-intensive sector.

These are all just snapshots of the situation today so we must be cautious in extrapolating over the year. Goods exports are still expected to put in a good performance next year, though its impact on the domestic economy is a little more debatable. But with European, US and global forecasts easing off, we shouldn’t expect Ireland to escape unscathed. Already, the Central Bank is revising downwards its manufacturing output projections for this year and next, compared to what they were estimating six months ago. This mirrors their downward revisions of GDP and GNP growth for next year.

If the European and US recoveries begin to stall (and already the US has experienced the weakest recovery since the Great Depression), our open economy will be affected. And with domestic demand continuing to struggle, the last thing we need is to catch a cold from the sneezes coming from the global economy.

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