Andrew Webb: Never underestimate impact of global trade on our economy in Northern Ireland
Economy Watch by Andrew Webb, chief economist, Grant Thornton
Export trade has particularly grabbed economists' attention over the past 18 months or more, with the US-China trade war and the confusion around how the UK will trade with the EU plays out.
Evidence of trading uncertainty is clear from the DHL Global Trade Barometer, which has been trending downwards for the past year.
The barometer entered contraction territory in May of this year. The latest figures, for September, show the index is at 47 (anything below 50 is contraction).
The global trading environment looks set to remain downbeat in the coming months, to the extent that the International Monetary Fund (IMF) has downgraded the prospects for global growth this year to 3%, down from 3.2%.
To place this in context, this is the lowest forecast since the financial crisis more than a decade ago. By 2020, the IMF suggest that tariffs already imposed or announced would shrink global GDP by 0.8%, the equivalent to twice the size of Ireland's economy. As we go about our daily lives, it could be easy to wonder what all the fuss on trade is about, and even with a rudimentary assessment, as one person recently suggested to me, "hardly any companies here export so what's the problem?"
Once I asked them where their car, phone, clothes, food, coffee etc came from, they started to see the point. In addition to increasing consumer choices and availability of essential items, international trade opens our businesses up to bigger markets into which to sell and generate more turnover and (hopefully) profits.
A significant proportion of this injection into our economy is then circulated across the economy through wages and spending on various goods and services. Trade also opens us up to competition and so our domestic companies have to become more efficient in order to compete.
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Growing Northern Ireland's export base has been a key pillar of economic policy here for decades. In 2016, the Department for the Economy published Export Matters, an action plan aimed at increasing the value of exports and external sales (sales to Great Britain) outside of NI by 80% by 2025.
The driving force behind this ambition was the ongoing concern that NI does not produce as much wealth per worker as most other UK regions - exports and external sales are seen as a way to solve this problem.
More recently, the Economy 2030 - Draft Industrial Strategy pointed towards a global focus, citing 'succeeding in global markets' among its pillars for growth.
Northern Ireland is a highly integrated, open economy, especially with Great Britain and Ireland. Before looking at the detail of our GB and Ireland relationships, our engagement with the global market is worth assessing.
Total sales by NI companies to customers outside NI totalled £21.4bn in 2017, a third of NI businesses' total sales.
However, these sales to external markets were down by about 10% on the previous year. That is £2.4bn in sales lost to the NI economy.
This decline was driven by a substantial decline in the food, beverages and tobacco sub-sector.
Setting aside trade with GB and Ireland for a moment, exports to the rest of the world were £2bn in 2017, again down on the previous year.
Our top exports are machinery and transport equipment, which accounts for just over half of our sales to the 'rest of the world' (ie not GB or Ireland) and chemicals which accounts for 20% of exports.
Our biggest exporting markets to the rest of the world are the USA, where we sell over a billion pounds worth of our products, Canada (£500m) and Thailand (£210m).
Looking closer to home and trade between NI and Ireland and NI and GB shows NI is trading in significantly greater volumes with our nearest market than with the wider world. As a cross-border supply chain survey in 2016 noted, there were over 750,000 export deliveries to Ireland, worth £3.4bn, in 2016.
Nearly £2bn came in the other direction, with 410,000 import deliveries. Ireland is Northern Ireland's single biggest export market (remembering sales to GB do not count as exports but are 'external' sales). GB is by far our biggest external market.
Through 1.8 million Irish Sea HGV crossings and 182,000 flights, we sell over £11bn worth of goods and services to GB, 17% of all sales by NI businesses and more than half of all external sales. Obviously the flow isn't one way and we purchase £20bn of goods and services from GB.
The ambition to get more firms exporting is long standing and decent progress was being made in that regard. At the end of 2018, there were 6,195 companies engaged in exporting from Northern Ireland, a figure that had increased steadily over the past three years. However, since the start of this year, the number of exporting businesses has declined to 5,775 according to the latest HMRC statistics.
With such uncertainty over the terms of trade that our businesses will enjoy with trading partners in the months and years ahead, this dip in the number of exporting companies raises concerns over whether companies here are being replaced in the supply chains of customers as a result of Brexit.
Alternatively, firms might be withdrawing themselves from international markets as a cautious reaction to expected trading difficulties.
It is difficult to know for sure why the number of exporters has fallen and time will tell if this is a blip in the statistics or the start of a worrisome trend.
We do know that exports are key to our economic successes and, while increased values are welcome, increased sales volumes from a diverse base of firms is a more desirable outcome.
In next week's Economy Watch, we hear from Danske Bank chief economist Conor Lambe