Mr. John McCarthy:

A couple of issues arise. The GDP numbers feed into the export model. That is a proxy, however, because what drives Irish exports are imports from the three regions to which we referred. As imports will always be stronger than the GDP, imports are stronger than GDP for all three regions. That would explain some of the increase. The other variable that feeds into our export model is a measure of competitiveness. The measure we use is what is known as a real effective exchange rate. This takes the nominal exchange rate and deflates it by relative price or relative cost developments. This year and next year, I do not foresee much improvement in relative prices vis-à-visthe euro area, for instance, because the harmonised index of consumer prices, HICP, in the euro area will probably be 0.4% or 0.5%, whereas it will probably be approximately 0.5%.
While there is not much improvement taking place on the relative price front, what we are seeing is an improvement in the exchange rate. What we do in terms of producing a forecast for the exchange rate is very much in line with what is done by the European Commission, the European Central Bank, the IMF and so forth. We hold the exchange rate constant at the end of September, project it forward on an unchanged basis and see what this means for next year relative to this year. We anticipate a depreciation of the exchange rate of the order of 3%. This will have an impact on competitiveness and, in turn, spur exports. These two variables explicitly come into our export model and both are moving in the right direction. However, Irish exports are difficult to model because they are fairly concentrated in a small number of sectors that are doing very well and are independent of competitiveness. These include information technology, which experienced growth of 40% last year, and aircraft leasing, which is also doing very well. In addition, we no longer have the patent cliff effect on the merchandise side.
A new phenomenon has also become evident in the past couple of quarters. The Deputy may have read some of the coverage of the Central Bank quarterly bulletin published last week, or today's letter from the Irish Fiscal Advisory Council, IFAC. The bulletin and the IFAC's letter draw attention to a phenomenon known as contract manufacturing, where an Irish entity contracts production out to a third country. This means production will take place in country A and the products, once produced, will be exported into country B. Such exports are classified under the new methodology as Irish exports, which is very unusual. It is almost impossible to model in the short term because it involves firm-specific types of issues. People may not have concerns in this regard but they find it difficult to understand. It is a relatively new phenomenon and we do not know whether it is cyclical or structural. It certainly had a major impact on exports in the first half of the year.
One has, therefore, a number of factors, namely, the gradual recovery internationally, the improvement in competitiveness, some sector-specific issues and the lag effect in respect of strong foreign direct investment. With regard to the strong inflows of foreign direct investment in recent years, once an announcement is made, it takes a year or two for the investment to take place. One then sees the exports subsequently. A combination of all of these factors is driving the very strong export performance.