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 .