Irish growth dependent on global picture

The value of Irish food and drinks exports increased by 9% last year, approaching €10bn for the first time, giving a growth of 40% over the last four years. This is commendable because, as a small open economy, Ireland is exposed to the swings of international markets.

For the last number of years, trading businesses have been challenged. Major uncertainty was brought about by two unusual factors. Firstly, we had the eurozone crisis, which was unlike any other currency crisis in that it was about the survival of the currency itself rather than a lack of growth.

Coupled with this, there were major difficulties in the US, which suffered from a weak fiscal policy and political interference on how government should fund itself. Although this crisis is not fully resolved, it has somewhat subsided.

It is just over five years since the financial crisis began and, in the more advanced economies, we are beginning to see signs of recovery.

According to a recent report by HSBC Bank, this year should see a modest acceleration of global growth. It predicts that the West is expected to grow and contribute more this year.

Although the pace of growth slackened last year, there are now very few large economies in recession.

Ireland

Labour drives the rest of the Irish economy and perhaps the most encouraging sign of all here has been the stronger than expected improvement in the jobs market. All sectors are contributing to the jobs growth, not only on a national level, but also regionally.

Ulster Bank chief economist Simon Barry says that interest rates look set to remain unchanged due to low inflation in eurozone. He believes there may be a further rate decrease in the near term, adding that if there is a change, it is more likely to be a cut rather than an increase. However, he notes that in the longer term he believes that interest rates will increase.

Barry said that the better jobs picture has underpinned a rebound in consumer confidence and some improvement in spending is starting to take hold. We saw this at the back end of 2013, where retail spending was relatively strong and this year car sales have started well.

UK

As our largest trading partner, the UK accounted for 42% of our food and drink exports with a value of €4.1bn. HSBC Bank predicts UK growth this year of 2.6%, up from 1.9% last year. Some analysts believe the British economy has the wrong type of growth, with too much focus on spending by households and building up inventories.

Britain has suffered a particularly deep recession compared to most other advanced economies and after nearly six years of negative or below-trend growth, the level of GDP is still some 2% less than it was at the start of 2008, according to HSBC Bank.

Sterling-euro exchange rates have swung from highs of £0.95 to lows of £0.78 over the last five years. Simon Barry believes that sterling could be set to strengthen in the short term and could go close to £0.80. He adds that Britain now has its strongest pace of employment growth since records began and, coupled with the strength of the UK economy, this could fuel increasing interest rates.

Eurozone

Continental Europe represents 32% of our exports and is valued at €3.2bn. While economic weakness continues in France and Italy, key markets like Germany, France and the Netherlands had double-digit export growth in 2013. Even though unemployment in the eurozone remains high at 12%, it has stabilised with consumer sentiment also picking up.

Figures from HSBC Bank show that average GDP growth is expected to swing from slightly negative last year to close to 1% per annum over the next two years.

International

International markets continue to play an important role for Irish food exports. According to Bord Bia, the value of trade jumped almost 30% last year. The region accounts for 26% of exports. The growth was led by China, southeast Asia and Russia, while Africa continues to show solid trade.

The US economy, which underpins the dollar and much of the other currencies, got off to a soft start in 2014. Weak economic numbers, including jobs in the US, have strengthened the euro against the dollar.

HSBC bank predicts US growth to rise 0.6% to just 2.5%. Developed economies are expected to grow slightly below 2% this year and next, while emerging economies are expected to grow close to 5% over the same period.

This week, the euro has been trading above $1.37 and is very close to the highs recorded last year. The average in 2013 was $1.33. According to Simon Barry, if it pushes closer to $1.39 this will make exports less competitive, but it would be cause for concern for the real demand in the US economy.

He believes that the dollar will strengthen against the euro as the US government continues to provide stimulus, but rates as low as $1.25 in the near term may not be possible.

Emerging economies

People are beginning to re-assess the prospects of emerging economies and HSBC are predicting a significant slowdown in growth from the 6-8% achieved in 2010 and 2011 to more modest levels of 4.5-5% in the next couple of years.

Last year, food and drink exports to China were 43% higher, reaching €390m. Food exports to China have trebled since 2010, but there are concerns that the pace of economic growth has slowed a little more than expected. Yet annual growth rates remain slightly above 7%.

Simon Barry explained that the Chinese have realised that there are limits to pushing their currency too much. With China wishing to stimulate domestic demand, their currency has risen around 10% against the dollar.

The starting point for a small open economy is that we need to have a favourable tail wind. Overall, the domestic economy still faces some headwinds and risks. Growth is poised to accelerate as domestic and external demand picks up. With modest growth coming back into developed economies over the next couple of years, the eurozone region will be the most challenged.

It appears that emerging markets will continue to be the driving force this year and next, while our competitiveness will depend somewhat on the relative strength of the euro to the US dollar.