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Economic rising tide could leave us high and dry

Exports, a key artery in the heart of the economy, are booming. Data in April showed a 30% rise year-on-year, while the export of goods are up 20% year to date.

Ireland, in a global context, is a somewhat unusual economy because it is so exposed to the tradewinds of international commerce.

Unlike many larger economies, where the domestic market accounts for the bulk of commercial activity, Ireland relies heavily on selling goods and services to an overseas customer base.

That makes our employers super-sensitive to anything that either enhances or hinders our ability to compete.
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Consider the past few quarters in Ireland. Our exchange rate against sterling and the dollar has declined as ECB policies and strength in these large economies has shifted foreign exchange in our favour.

Assuming all other inputs are unchanged, this makes Irish exports more competitive. Either companies can cut prices while maintaining budgeted margins or they can embellish profits by keeping prices in the UK and US steady.

Economic growth in these two big economies is also steaming ahead and that should enhance the volume of products sold, further enhancing the financial performance of exporting businesses.

For low-margin exporters, such as food producers, the benefits of even small shifts in foreign exchange can be material.

For high-margin businesses, such as pharmaceuticals, where recent data is very strong, the benefits are especially positive. Given this array of positive macroeconomic factors, why should we worry at all?

Firstly, these external movements in exchange rates have nothing to do with self-managed monetary policy inside the Central Bank.

Instead, it is the somewhat distant ECB that is effectively managing the euro exchange rate and it is much more sensitive to the needs of the large French and German economies, which require a low euro at present.

Second, the momentum in the UK and US economies has nothing to do with politics or economists working in Ireland. These massive trading partners are having a run of economic momentum that happens to benefit Irish exporters for the time being.

I mention these points because there is a high risk that the economic recovery we are undergoing is somehow being portrayed as a prize that has been won through the hard sacrifices of the Irish people.

This narrative is simply untrue, and allowing it to persist creates unreasonable demands on various parts of Irish society.

Of course, that is not to say good things have not taken place in the past five years. Madcap capital pro-grammes were shelved. Who remembers Dublin Metro?

A sense of reality entered any discussion about pay rises in the private and public sectors. The one-off and cyclically uncertain property tax bonanza was understood for what is was — a volatile stream of revenue that cannot be assumed structural or permanent.

All of these factors — key elements in rebuilding competitiveness in a shattered economy — now seem to be sliding off the altar of economic prudence. Instead, one lobby group or political movement after another have concluded that the gates are open for tax cuts and higher spending.

The febrile atmosphere that comes with a looming election has fanned the flames further. The old game of “I’ll trump your giveaway promises” is back with a vengeance. A rising tide lifts all boats but a subsequent receding one can leave you high and dry.

If the euro strengthens and the US and/or UK economies weaken while we gorge ourselves on a new round of reckless economics, the resulting mess will be harder to fix than ever.

Article Source: http://tinyurl.com/kbwqb42

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