Export Review: Industry Half-Year 2014
Despite the poor economic performance of many of our key markets across Europe, exports from Ireland continued to perform strongly in the second quarter of the year, writes John Whelan, Export Sector Specialist at AIB.
Of particularly note in Quarter 2 (Q2) was the return to growth of goods exports, which grew by 3.7% (compared to the same quarter in 2013) following a contraction of 0.4% in Q1. The strong second quarter brought the January to June good exports to €44billion, up 1.5% over the same six months of last year. This was driven by the unexpected growth in pharmaceutical exports in Q2, which has suffered over the past two years due to end of patent issues hitting global sales values and also due to another surge in agri-food exports over the period. Services exports continued their growth trend at 5.7% in the second quarter, bringing exports for the first half of the year to €47 billion, an increase of 5.5% on the same period last year. In total, goods and services exports grew by 3.5% to €91.2 billion in the first six months of the year. This is slightly below the Central Bank and ESRI forecasts of 4.4% and 3.7% respectively for 2014.
However, with the Ukraine crises taking a turn for the worst and the related Russian trade and investment embargoes coming into effect in August, the second half of the year could prove more difficult for the export industry.
Source: CSO and industry estimates for Q2 services exports 2014
In its latest release, The World Trade Organization marked down its global growth forecast for 2014 by 0.3 % to 3.4%, reflecting both the legacy of the weak first quarter – particularly from the USA –and the less than optimistic outlook for several emerging markets. The International Monetary Fund (IMF) also foresees the global economy expanding less than it had previously forecast, slowed by weaker growth in the United States, Russia and developing economies, and is forecasting a similar 3.4% global GDP growth.
The weaker growth estimates underscore the need for central banks in Europe and the US to keep interest rates low. The Federal Reserve (the Fed) has pegged the short-term rate it controls at nearly zero for more than five years. But most economists expect the Fed to start slowly raising that rate in mid-2015. During the second quarter, the European Central Bank cut its benchmark rate to 0.15%, a record low. It has also placed a negative rate on the deposits it holds for commercial banks to try to get them to lend more. In August, Bank of England announced that it would not increase its interest rate, from the current 0.5%, until industry wage growth increases look imminent, which it did not expect to happen in 2014.
However, despite these worsening global trade forecasts, the Department of Finance’s August Economic Bulletin retained a bullish forecast of Ireland’s GDP growth at 2.1%, which is significantly higher than that of the IMF and EC, both forecasting a growth of 1.7%.
Key Drivers of Ireland’s Exports
In the first half of 2014, the key sectors driving Ireland’s goods export industry were:
- Agri-food exports, which grew by 10.2% to €4.6 billion
- Medical devices exports, which grew by 4.9% to €4.8 billion
- Manufactured and engineering exports, which grew by 4.8% to €3.8 billion
- Pharmaceuticals and chemicals exports, which grew by 1.1% to €26.0 billion.
Meanwhile, the key services export sectors driving the growth were:
- Business services, with export growth of 14.0% to €10.6 billion
- Computer services, with growth of 3.8% to €20.1 billion
- Financial services, which grew by 3.1% to €4.2 billion
- Tourism and travel exports, with growth of 3.0% to €1.5 billion
- Reinsurance export services, with growth of 2.0% to €4.7 billion.
The economic health of the main markets for these goods and services is critical to the future growth prospects of Ireland’s export industry, but also to overall growth of the economy. In macro terms, the political difficulties in Ukraine, Syria, Palestine, Tunisia, Pakistan and in a number of African states is de-stabilising trade and investment across these and many related markets. However, the core markets for Irish exports are less volatile and showing some signs of growth.
Ireland’s core markets in the first half of 2014:
Bought 24% of goods and 9% of services exports from Ireland in the first half of the year. The US economy expanded by 4.2% in Q2 after a contraction of -2.1% in Q1, but is forecast by the IMF to grow across the year by 2.8% in GDP terms. Exports from Ireland will be bolstered if the US economic growth seen in Q2 continues.
Bought 7.2% of goods and 19% of services exports from Ireland in the first half of 2014.The UK economy grew by 3.2% in Q2, a major increase on the 0.8% growth rate from Q1. It marks the sixth consecutive quarter of economic growth, with overall GDP now above pre-crisis levels. Unemployment fell again in Q2 and is now at 6.5%, the lowest since 2008. This is the largest and most important market for indigenous Irish exporters. Any disruption to the UK economy can impact severely on a wide range of exporting SMEs. Fortunately, the outlook is very positive, which should spill over into more export demand from Irish producers.
- Eurozone countries
Accounted for 34.7% of goods and 32% of services exports from Ireland. The majority of these economies have performed poorly in the first half of the year, with the IMF revising downward its forecast to 1.0% GDP growth across the region for 2014.The German economy contracted by 0.2% in Q2, the French economy showed zero growth for a second quarter and its Prime Minister recently stated that its previous forecast of 1% growth this year will be impossible to reach. Italy is also back in recession. These are all key export markets for Irish goods and services producers. This Eurozone economic slump, now stretching into its sixth year, is a real worry for Irish exporters who have been developing the Eurozone market in a strategy to escape the exchange rate volatility on exports to the UK and USA markets.
Prospects in BRIC Economies and East Asia:
The outlook for Brazil, Russia, India and China remained subdued during the second quarter of 2014 due to weaker domestic demand, continued reversals in capital flows, and rising geopolitical uncertainty. According to the World Bank, growth in emerging economies is expected to remain flat in 2014, but output is expected to grow in 2015 and 2016.
Irish exporters have been making better strides in expanding sales into East Asia than to Brazil or India where exports fell again during the first half of the year. By contrast, exports to China grew by 3.6% in the first six months of the year. Exports also grew in the period to Japan by 8%, South Korea by 32%, Taiwan by 29% and Thailand by 24%. Further growth opportunities are likely to arise from the multilateral collaboration among the 10 countries forming the ASEAN economic pact, which is anticipated to be concluded next year.
If you require finance to expand into new markets, talk to AIB today.
AIB’s Outlook: Exports report – in association with Bord Bia and the Irish Exporters Association (IEA) – provides detailed research, analysis and commentary, on a multi-sectoral basis, of the SMEs that are currently exporting goods or services from Ireland. An important part of this report is the specially commissioned detailed research on exporting SMEs, which has been carried out independently by Ipsos MRBI on behalf of AIB.
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