Economics:This year will be an acid test of the flexibility of the Irish economy. For the past four years, the economy has surfed a wave of domestic demand. Now, the domestic economy is becalmed by a housing slump and by waning consumer confidence, writes Paul Tansey.
In these circumstances, to maintain the economy's momentum, policymakers must reshuffle the pack of national economic resources, switching them from the domestic to the foreign sector, from home demand to exports.
In practical terms, this means ceasing attempts to prop up ailing industries like housebuilding and encouraging efforts to stimulate exports of goods and services.
Recalibrating the economy in this way will not be easy, but it offers the only feasible route to sustained economic and social progress in the years ahead. The State simply cannot continue to depend on a small and heavily indebted domestic population of 4¼ million people to provide a continuing impetus to economic and social improvement.
However, in seeking to raise the State's export performance, four formidable obstacles must be surmounted.
First, the foreign markets to which Ireland is seeking to sell additional goods and services are flatter than for some time past. The US economy is on the cusp of recession. Economic activity in Britain - the major foreign market for indigenous Irish exporters - is slowing. Projections for the euro zone foresee the rate of economic expansion weakening in 2008. Slower growth in Ireland's traditional export markets places a premium on competitiveness.
Second, Ireland's cost and price competitiveness is waning. Consumer price levels in Ireland in 2005 were almost 19 per cent higher than in Britain and were the second-highest in the European Union after Denmark*. High living costs are reflected in high production costs. Moreover, since 2005, Ireland's inflation rate has been consistently higher than the rates of price increase in competitor countries.
Third, Ireland's cost and price competitiveness is further compromised by the strength of the euro against the currencies of the State's two major foreign customers - the United States and Britain. In 2000, the average euro exchange rate against the US dollar was $0.92 while the rate against sterling was £0.61. This week, the euro exchange rates against the dollar and sterling are $1.47 and £0.75 respectively.
Thus, since 2000, the euro has strengthened by 60 per cent against the dollar and by 23 per cent against sterling.
Most worrying of all from an exporting perspective is the speed of sterling's recent slippage against the euro. In the past six months alone, the value of the British currency has fallen by more than 10 per cent against the euro.
Fourth, the pace of Irish productivity growth - output per person - has wilted since the halcyon days of the late 1990s. Superior productivity growth can act as an antidote to losses in nominal price competitiveness.
Irish labour productivity growth averaged 2.6 per cent annually between 1995 and 2005, surpassing annual US productivity growth at 2.2 per cent and outdistancing the yearly growth in output per worker in the EU, at 1.2 per cent, over the decade*. However, the wheels have fallen off the Irish productivity bandwagon in recent years. Over the period 2003 through 2006, labour productivity in Ireland barely managed an average advance of 1 per cent a year.
On the face of it, Ireland's exports should be wilting under the combined weight of these pressures. However, the reality is that the State's export performance has perked up in the recent past. In its most recent Quarterly Economic Commentary, the Economic and Social Research Institute (ESRI) forecast that total export volumes would increase by 5 per cent in 2008 after growing by 5.7 per cent in 2007. However, it is the composition of export growth, rather than its scale, that points to the opportunities available in the future.
In the first place, services, rather than goods, have been the engine of export growth thus far this decade. In 2000, services accounted for just 22 per cent of total exports. By 2006, services had raised their share of total Irish exports to 40 per cent and this proportion is forecast by the ESRI to rise to 45 per cent in 2008. Insurance, finance and business services have been the backbone of the growth in services exports, assisted by a robust expansion in tourism exports.
Second, Irish food exports have been played onside by the steep rise in international commodity prices over the past year. Food, drink and tobacco remains the third-largest component of Irish exports after chemicals and ICT, accounting for almost 10 per cent of all merchandise exports in the first nine months of 2007.
Moreover, the value added generated and retained in Ireland by the food industry is markedly higher than in industries dominated by foreign multinational companies. International food prices are set to strengthen further in the year ahead. As a result, the Irish food and beverage industry faces more buoyant market conditions than for many years past.
Third, the global economy continues to exhibit rapid growth - but not in the economies to which Ireland's traditionally exports. There is thus a need to target export markets that are expanding rapidly rather than those that are stalling. Ireland has been singularly unimpressive in penetrating Asian markets. Less than 8 per cent of all Irish exports of goods and services in 2006 were destined for Asia. Moreover, merchandise exports to China and India amounted to a grand total of €1.7 billion in 2006, less than 2 per cent of all goods exports.
Thus, in the midst of economic difficulties, there remains scope for substantive export expansion. But it will require a concerted, co-ordinated and innovative approach to exploit the available opportunities.
Step forward Micheál Martin, Minister for Enterprise, Trade and Employment, and John McGuinness, Minister of State for Trade and Commerce. The export ball is in your court.
• JJ Sexton, Trends in Output, Employment and Productivity in Ireland 1995-2005 in Perspectives on Irish Productivity, Forfás, 2007.
