Trade collapses

Jim O’Leary had a piece yesterday in the Irish Times which was worth reading for a couple of reasons. First, he has a nice account of the incentives facing economic forecasters. Second, he draws attention to a truly astonishing forecast, or assumption, in the Central Bank’s recent Quarterly Bulletin: that, while domestic demand will collapse in 2009 (which makes sense: the Central Bank assumes that gross domestic expenditure will fall by 7.6%), our exports will only decline in volume by 0.7%. If true, this would obviously mute the overall fall in Irish GDP, and the Central Bank is forecasting a decline of just 4%.

Jim convincingly shows why the assumption regarding exports is implausible. Here are a few more facts. According to the CPB Netherlands Bureau for Economic Policy Analysis, the volume of world trade fell by 6% last November. That’s right: by 6%, in one month. US imports fell by 7.8%; Japanese exports fell by 10.8%.

The CPB cautions that monthly world trade figures are volatile, and that one should focus on moving averages. Of course, that becomes a less useful strategy when one has just passed the peak! More evidence of the extraordinarily rapid collapse in world trade comes from IATA, which reports that the volume of international cargo shipped by air was 22.6% lower in December 2008 than in December 2007 (HT Calculated Risk).

By way of comparison, the volume of world trade fell by a little more than a quarter over the 3 years 1929-1932.

As Jim says, it seems safe to assume that exports will contract by a lot more than the Central Bank is currently forecasting, and that the same will therefore be true of GDP and employment as well.

10 thoughts on “Trade collapses”

  1. @FPL: I would think so. But those jobs are already gone so this is not the worst to be feared.

    @Patrick: yes, you are right. One question then is, which exports fall? the artificial transfer-pricing ones, or the real ones?

  2. On the points above, I think the influence of Dell has been overstated to an extra-ordinary degree. It may have been important to Stab city and its environs, but not nationally.

    I would also suggest that the Polish operation is being remunerated on a cost plus basis, probably no more than cost plus 4%. Polish tax authorities would have very little experience of transfer pricing and would be happy with the payroll take. It is also possible that the profits if any will accrue on an island in the Atlantic, which some think of as a tax haven. The value added side of the business is remaining here for the present.

    Mr. O Rourke is correct there is absolutely no sign of the licensing type of operations leaving. Indeed Ireland is now so embedded into many of their tax strategies, that it would be very hard for them to withdraw.

    There is a very interesting US GAO report prepared for a few of the more protectionist US congress members GAO-09-157, where Ireland gets very frequent dishonorable mention. The very excellent Kathleen Barrington of the SBP made reference to it a couple of weeks ago.

    It would not surprise me to see little or no drop in Oirish exports in 2009.

  3. The monthly statistics from the Central Bank on Credit Card expenditure would also suggest that personal spending may also fall by much more than 7.5%. Gross spending on credit cards for Q408 is just 90% of spending in Q407. Expenditure on big ticket items is also in total freefall with car sales running at only 34%of 2008 levels.

    If incomes are declining and people begin to pay off some of their very large debts, then it seems likely that consumer expenditure will collapse further.

  4. Kevin. Not the jobs. I meant the impact of Dell on our exports as a % of GDP. If the central bank is forecasting a .7% decline and Dell was alleged to contribute 5% of Irish exports then it would seem that their estimate is short of the mark.

  5. Well, there was a limit to the value of the manufacturing actually done here. For a start, it was largely assembly. Also, you’d be surprised how relatively little of the cost of a computer actually goes on the hardware – the customer support, logistics, advertising and so on are a big chunk of the cost of a EUR 450 computer. The real problem will be if we gradually lose this work (some of it has been lost to the subcontinent for quite a while).

  6. Niall, Credit card statistics alone are highly misleading, as debit cards have been winning considerable wallet share over the last couple of years, and now account for around the same amount of spending. They should not be taken in isolation (though thats not to say the numbers aren’t bad).

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