Indigenous Irish exporters are dependent on UK for more than 50% of their exports while US firms overwhelmingly dominate exports from Ireland - - Finfacts.

CSO numbers show that Irish exporters to Britain have been having an extremely tough time of it.

Preliminary data for March show that exports to our closest major trading partner were about 10% lower in the first quarter of this year compared to the same period in 2008.

Total goods exports were actually up over the same period - not by much, but at least growth of 1.4% is on the right side of zero. Thus, from an Irish perspective the British market has been a particularly weak area of demand in a generally very weak international picture.

The weakness of our exports to Britain reflects the interaction of two powerfully negative forces.

First, the British economy has been going through a very severe economic downturn. In fact, the 3.4% drop in British GDP over the six months to March is without precedent in some 55 years of quarterly data. Second, sterling’s sharp fall versus the euro on the currency markets has been making it even more difficult for Irish firms serving the British market.

Over most of the five years to the end of 2007, the euro/sterling rate traded in a narrow range of about 66-72p, averaging 67.5p in that period. But sterling has since weakened sharply, moving from below 68p in August 2007 to a record low of 98p to the euro late last year. Indeed, the final few months of last year saw a particularly brutal move which saw a shift from 77p to 98p between late October and late December.

Thus, a given level of sterling revenues fell by a staggering 27% in euro terms in this two month period alone - an very painful scenario, especially considering that many Irish exporting firms operate on relatively low profit margins.

Nevertheless, recent developments offer encouragement. First, the British economy is beginning to show signs of life. Official estimates out last week show the manufacturing sector is beginning to emerge from its recent slump. Production has now risen in each of the latest two months for which we have data following a horrible 12-month run of consecutive declines.

Moreover, the May reading of the closely-followed Purchasing Managers’ Index showed that activity in the key services sector returned to positive growth for the first time since April 2008.

Even conditions in the housing market are improving: mortgage approvals have risen by over 50% from their November low (albeit they are still at very low levels historically), and the rate of decline in house prices looks to be easing.

Second, sterling has shown a lot more resilience on the currency markets this year. An impressive run of better than expected British economic numbers in the areas noted above has helped the British unit to a significant rally.

While this was briefly interrupted by concerns about the stability of the British political environment in the run up to the recent elections, sterling has continued to advance on net, with euro/sterling hitting a six-month low of 85p last week.

Some measures of sterling’s long-run equilibrium value against the euro centre on a 70-75p range. A deviation from this notional fair value of some 16% continues to look excessive. Economic cycles will continue to play a role in encouraging the adjustment as the evidence continues to build that the British economy is going to emerge from the recession sooner than the eurozone.

Overall, valuation considerations should help sterling to continue to recover versus the euro in the quarters ahead (though as ever with markets, don’t expect a straight-line move).

I see it hitting 80p by the end of the year. This would certainly be good news for Irish exporters, especially if the British economy can continue its gradual recovery.

SEE Finfacts article: Irish Economy: Home Truths on Irish Exports as Ireland faces a changed global economy in the decade ahead