Thursday, 5 March 2020
Department of Finance
100. To ask the Minister for Finance the exposure GDP faces from contract manufacturing particularly with regard to potential trade disruption as a result of the Covid-19 outbreak; the proportion of goods that are manufactured in China but booked here using the contract manufacturing method; the way in which it impacts on GDP; and if he will make a statement on the matter. [3746/20]
Exports from Ireland under 'contract manufacturing' arrangements account for approximately one-third of Irish exports, amounting to just over €68 billion in 2018 (latest available full-year data).
Contract manufacturing is a form of outsourcing whereby an Irish-resident firm engages a company abroad to manufacture goods on its behalf (and vice versa). Despite having no actual production or associated employment in Ireland, this activity is recorded as production in Ireland under the global national accounting framework (which, in the European Union, is referred to as the European System of Accounts 2010, ESA2010). When the products are subsequently exported, this is treated as an Irish export.
These activities artificially inflate Irish GDP. GNI*, however, is not inflated by contract manufacturing as this measurement adjusts for foreign-owned intellectual property located in Ireland (the main domestic input into contract manufacturing).
A large proportion of Irish-outsourced contract manufacturing takes place in China which, of course, was the epicentre of the COVID-19 outbreak and where significant disruptions to production have taken place.
Given these disruptions, it is certainly possible that Irish production and exports associated with contract manufacturing could be affected. If this was to happen, headline GDP would be adversely affected although there would be no impact on GNI* or employment in a direct sense. If the lost output and sales are not recovered by year-end, it is possible that corporation tax receipts could be affected.
The extent of the impact on the economy will depend on the duration of the disruptions to production in China (and elsewhere) caused by COVID-19. My Department will continue to monitor developments and advise accordingly.
101. To ask the Minister for Finance the potential exposure to the economy from the Covid-19 outbreak; the potential impacts on tourism, travel, trade and global supply chains; and if he will make a statement on the matter. [3747/20]
At the outset, it must be stressed that it is difficult to quantify the global and domestic economic impacts of the Covid19 outbreak at this stage. This is because the impact will depend on several factors, not least the duration of the epidemic as well as the containment measures put in place to limit its spread. These are simply impossible to estimate and, accordingly, it is extremely difficult to quantify the macroeconomic impact at this point in time.
Nevertheless, the OECD has estimated that, in a scenario where economic disruption is mainly confined to China, with only limited spill-overs to other regions, measures put in place to contain the Covid19 virus could take ½ a percentage point (pp) off the growth rate of the global economy this year.
I would stress, however, that this is a very benign scenario - it is also based on the assumption that the impact is mostly contained to the first quarter of this year, which appears a somewhat heroic assumption. In a broader contagion scenario, where the economic fall-out is longer-lasting and more widespread, the OECD estimates that this could take 1½ percentage points off the global growth rate.
As small and export-oriented, the Irish economy is particularly sensitive to external economic conditions. Over the medium-term, the pass-through of a global shock to the domestic economy tends to be broadly one-for-one - i.e. if world demand falls by 1 pp then, over the medium term, Irish economic activity is c. 1 pp below what would otherwise have been the case – with a less than one-for-one impact in the short-term. Slower growth would, in turn, have negative consequences for the labour market and the public finances.
While difficult to quantify at this stage, there are likely to be negative impacts for the Irish economy across a range of sectors. An increasingly integrated world economy means that supply-chains are also increasingly integrated, with many being ‘just-in-time’. Falling production of intermediate goods in China is now affecting the final output in other countries that will also likely impact production facilities in Ireland. In terms of direct trade links, the share of goods trade with China is around 6 per cent of total trade, based on preliminary data for last year.
However, indirect exposure to China is potentially more significant. The euro area is Ireland’s largest trading partner, accounting for close to a third of total exports. In turn, China accounts for 9 per cent of total euro area goods and services trade. The tourism and travel sectors are also likely to be negatively affected as travellers in many parts of the world are likely to take a more cautious approach than would otherwise have been the case.
My Department is monitoring the situation closely and will prepare updated economic forecasts over the next month or so, taking into account all of the latest available information. It must be stressed, however, that in the current environment, there is much more uncertainty than normal attached to any set of forecasts.