Exports are target for sustaining growth

Economics: The global economy is booming. World trade volumes are expanding at rates not seen for three decades

Economics:The global economy is booming. World trade volumes are expanding at rates not seen for three decades. In turn, this surge in global trade is powering rapid international economic expansion.

The recent past has also witnessed a rebalancing of economic growth within the western industrial world.

Where the United States was making the running in the economic race until 2006, the baton has now been passed - believe it or not - to Old Europe.

World merchandise trade volumes expanded by 9.6 per cent in 2006 and are forecast by the Organisation for Economic Co-operation and Development (OECD) to grow by a further 7.5 per cent this year before accelerating to an expansion rate of 8.3 per cent in 2008.

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The scale of global growth has been so strong that it eventually awakened even the slumbering euro-zone economies.

Their performance perked up in 2006 and activity levels should continue to grow solidly both this year and next.

Recent OECD forecasts for the major euro-zone economies - and for Britain - are shown in Table 1. Two key trends are illustrated.

First, growth in the United States is decelerating quite sharply, and for reasons that should send a shiver down Ireland's collective spine.

The slowdown in the US has been caused by a dramatic contraction in housebuilding, which has pushed output below its potential rate of growth.

In the second place, Table 1 illustrates the long-awaited pick-up in the pace of European economic growth. Led by a renascent German economy, the euro zone's growth rate almost doubled between 2005 and 2006 and is forecast to outstrip the rate of growth in the US this year.

The British economy - the most important market for Irish exporters - is also exhibiting solid growth.

The treasury's own forecasts broadly reflect the OECD view, anticipating real GDP growth in the range of 2.75 per cent to 3.25 per cent in 2007 and a real expansion rate ranging between 2.5 per cent and 3 per cent in 2008 and 2009.

These figures convey a clear message to the new Government: the external economic environment could hardly be better.

To capitalise on these market opportunities, it is important that the Government undertakes some economic rebalancing of its own.

In essence, it must seek gradually to shift the focus of Irish economic growth from the domestic to the foreign sector. In other words, policy should aim to stimulate export growth rather than the continued swift expansion of home demand.

Recent OECD data for Ireland show that the contribution of net exports - exports less imports - to Irish GDP growth was negative in aggregate over the three years from 2004 through to 2006. It is forecast to be negative again in 2007 and trivial in 2008.

The annual growth in Irish export volumes has decelerated sharply since the late 1990s, while import volumes continue to rise very swiftly, powered by the strength of the domestic consumer spending boom.

In seeking to refashion and reinvigorate the export drive, the Government needs to take five steps.

First, it must retain the 12.5 per cent rate of corporation tax. To its credit, the Programme for Government is unambiguous on the retention of the status quo.

Second, Ireland's tax competitiveness must be marketed more strenuously abroad to leverage an accelerated inflow of foreign direct industrial investment. The vintage of the foreign capital stock in Ireland is ageing, leaving its output increasingly at risk to cost competitive pressures.

The best hope for manufacturing growth here is the recruitment of new, sophisticated, technology-

driven foreign projects.

Third, internationally traded services should become the centrepiece of domestic efforts to revive the export drive - when you find a winner, back it.

Services exports have achieved startling success in recent years, tripling in value between 2000 and 2006.

In consequence, their share in total Irish exports has doubled from 19 per cent to 39 per cent over the past six years.

There is no indigenous reserve army of potential manufacturing exporters of any substantial scale awaiting Ireland's call.

Fourth, rates of publicly inflicted price increases - by Government, by local authorities and by public utilities - must be curbed.

This will require tougher regulation of public utilities and the development of new funding mechanisms for local authorities.

Fifth and finally, the Government should get back to basics on the pay front.

The boom was built in part on a trading of tax cuts for pay moderation.

With the real benefits of the current pay deal being whittled away progressively by an inflation rate that remains stubbornly above 5 per cent, the Government needs to play its tax-cutting cards earlier rather than later to pre-empt further wage inflation.

Wheel on the PRSI cuts in the next budget, please.