28th October 2009
Recent numbers from the Central Statistics Office (CSO) show that Irish exporters to the UK have been having an extremely tough time of it.
The most recent data available shows that exports to our closest and most important trading partner were about 9% lower in the first four months of this year compared to the same period in 2008.
Total goods exports were actually up some 3% over the same period indicating that from an Irish perspective the UK market has been a particularly weak area of demand in a generally very weak international picture.
The weakness of our recent export performance to the UK reflects the interaction of two powerfully negative forces. First, the UK economy has been going through a very severe economic downturn. In fact, the total 5.7% drop in UK Gross Domestic Product (GDP) over the course of the recent recession is without precedent in some 55 years of quarterly data.
Second, sterling’s sharp fall verses the euro on the currency markets has been making it even more difficult for Irish firms serving the UK market. Over most of the five years to the end of 2007, the Euro/Stg. rate traded in a narrow range of about 66-72p, averaging 67.5p in that period. But sterling has since weakened sharply, moving from below 68p in August 2007, to a record low of 98p to the euro late last year, with a particularly brutal move which saw a shift from 77p to 98p between late October and late December. Thus a given level of sterling revenues fell by a staggering 27% in euro terms in this two month period alone – an extremely painful scenario by any standards especially considering that many Irish exporting firms operate on relatively low profit margins.
Recent developments offer encouragement on both fronts, however
Firstly, there are now widespread indications of some improvement in global economic conditions. Importantly from an Irish perspective the UK economy is participating in this trend and is beginning to show signs of life. Closely-followed surveys of activity in both the manufacturing and services arenas have rebounded strongly from their record lows seen around the turn of the year. These are now indicating that the UK economy will return to growth over the balance of this year, a scenario that owes much to the very aggressive action of UK policy-makers in countering the forces of recession. Special mention for the Bank of England is warranted here as it has slashed rates to effectively zero and is pumping £175bn of newly-created central bank money into the system in order to revive spending and demand.
Recovery is not likely to be particularly strong as the trauma of the financial crisis will linger as a headwind for both banks and households for some time to come. Nonetheless, expansion in the UK economy, even if relatively modest, is certainly a major turnaround compared with the sharp weakness which had previously dominated.
Secondly, sterling has shown a lot more resilience on the currency markets this year. An impressive run of better than expected UK economic numbers has helped the UK unit to a significant rally. From the record low of 98p late last year, it has recovered to about 88p at time of writing, a move of some 12% - and in the right direction too from the perspective of an Irish exporter.
Some measures of sterling’s long-run equilibrium value against the euro centre on a 70-75p range. While I would be very surprised to see such levels revisited anytime soon a deviation from this notional fair value of some 18% continues to look excessive and I think a target of 80p by year end continues to look reasonable. The respective economic cycles will continue to play a role in encouraging this expected adjustment as it looks as if the UK recovery is running ahead of developments in the euro zone. On implication of this is that the Bank of England will likely be moving to raise rates before the ECB albeit that it is likely to be into next year before either central bank gets to the point of pulling the trigger.
Overall it looks as if the international environment including the key UK market is emerging from the depths of recession. This is certainly good news for Irish exporters, especially if sterling can also continue its gradual recovery on the currency markets.
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