BUSINESS FIRST NORTHERN IRELAND ECONOMIC OUTLOOK 2017
Divergence: the theme of 2017
by Richard Ramsey, chief economist, Northern Ireland, Ulster Bank
ivergence has been a key theme of the Northern Ireland economy during
Drecent years, with our economic performance consistently diverging from – i. e. falling further behind the rest of the UK.
But divergence has recently become more prominent in others areas too, including between the first and second half of 2016, the performance between sectors, within the labour market, and in terms of our domestic and export performance. And this is a theme that is set to become even more prominent in 2017.
During the first half of 2016, the Northern Ireland economy performed well, with economic and employment growth continuing.
Northern Ireland’ s Composite Economic Index, a proxy for GDP growth, revealed a notable pickup in the annual economic growth rate from 0.9 per cent in Q1 2016 to 1.6 per cent in Q2.
However, this conceals diverging growth rates for the public and private sectors. The latter posted a robust 2.9 per cent yearonyear expansion in Q2, whereas the public sector reported a hefty rate of decline( 2.6 per cent). The services sector expanded at its fastest rate in 10 years in Q2(+ 4 per cent year on year) with strong growth recorded in consumer sensitive sectors.
Despite three years of a recovery, Northern Ireland’ s private sector has recouped just 55 per cent of the output lost during the downturn. Private sector output in Q2 2016 was at the same level it was 11years ago.
The second half of 2016 has been much weaker than the first half.
This is borne out in the PMI surveys which suggest that both economic and employment growth has dropped down into a low gear. Following stagnation in September, Northern Ireland’ s private sector returned to growth in Q4. However, the pace of growth was sluggish and weaker than all other UK regions bar one.
Perhaps the most significant aspect of the most recent PMI surveys concerned new orders, and the contrasting performance of the domestic and export markets. Overall, incoming orders have failed to grow since June.
However, export orders expanded at their second highest rate since the survey began. Pharmaceuticals is one notable growth area, benefiting from sterling weakness versus the dollar.
But the divergence between overall orders and export orders specifically implies that domestic orders remain pretty subdued.
The converse however seems to be the case within the construction sector.
Given Belfast’ s crane cluttered skyline, it
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would appear that business conditions within the local construction market are relatively buoyant.
However, despite this, and perhaps surprisingly, the PMI points to rapid rates of contraction in construction output orders and employment.
This is largely due to subdued demand within a major external market – i. e. GB. But it is our view that the construction recovery should continue to build.
The EU REferendum In terms of the EU referendum vote, it has proved to be a mixed blessing for firms On the one hand, sterling’ s weakness against the euro has boosted export price competitiveness and helped to deliver a record year for the tourism industry.
Meanwhile some PMI survey respondents say that increased uncertainty following the vote has negatively affected orders. The outlook for foreign direct investment also looks highly uncertain due to BRUMP – Brexit and Trump.
A weak pound may be positive for exporters( and crossborder retailers) but it is bad news for importers. Input cost inflation is accelerating. Manufacturers and retailers are bearing the brunt of the input cost inflation. This will feed through into significant rises in consumer prices in 2017.
The Labour Market
In relation to the labour market, the headlines in the latest labour statistics make for pleasant reading. Unemployment is continuing to fall with the headline rate hitting 5.6 per cent in Q3 2016 close to an eightyear low.
Meanwhile fresh record highs and lows were established for the employment and economic inactivity rates respectively.
However, these headlines conceal a significant divergence with respect to gender. Male unemployment has risen significantly from 6.2 % in Q4 2015 to 7.3 per cent for Q3 2016. Meanwhile the corresponding rate amongst females has plummeted from 5.7 per cent in Q1 2016 to 3.7 per cent in Q3 2016.
This gender story partly reflects the contrasting fortunes between the male dominated manufacturing sector and the retail and hospitality sectors that have high concentrations of female workers. In 2017, Northern Ireland’ s unemployment rate is expected to back towards 6.5 per cent.
In conclusion
Overall, it is encouraging that the private sector remains in growth mode. What is concerning though is that the rate of employment and output growth remains relatively weak.
Furthermore, the largest contributor to growth remains the retail sector. The retail and hospitality sectors should continue to benefit from crossborder trade in 2017 due to sterling weakness.
However, given that inflation pressures are intensifying, these will increase increasingly come to the fore in 2017 with rising consumer prices, and will ultimately act as a major brake on growth.
Furthermore, a range of benefits have been frozen until 2020 which, coupled with inflation in excess of 2.5 per cent, will see real incomes fall. Northern Ireland consumers will say farewell to the consumer sweet spot that they have enjoyed for two years.
Following growth of around 1.5 per cent in 2016, the Northern Ireland economy will do well to avoid recession next year. Economic growth is expected to be a marginal < 0.5 per cent at best.