By Conor Lambe, Chief Economist at Danske Bank

This morning, Danske Bank has published its latest Northern Ireland Quarterly Sectoral Forecasts report, detailing how we expect the economy to perform over the rest of 2020 and into 2021.

The coronavirus pandemic had a striking impact on economic activity in Northern Ireland in the first half of 2020. The latest data shows that both services output and production activity were more than 20 per cent lower in the second quarter of the year than they were in the final three months of 2019, before the onset of the pandemic. But the recovery in economic activity now seems to be underway, though we think output levels will return to their pre-coronavirus levels only gradually.

Overall, we are forecasting that the Northern Ireland economy will experience a contraction of around 11 per cent in 2020, before growing by about 7 per cent in 2021.

We are also projecting that the labour market will weaken considerably in the remaining months of 2020, with the unemployment rate set to rise sharply towards the end of the year.

But what are main factors that sit behind these numbers? What role will policy play in supporting the economic recovery? And what about the balance of risks currently facing the economy?

Here are five things to note from our latest report.

1. Extent of coronavirus restrictions an important determinant of growth
Following the period of lockdown that led to large falls in economic output at the end of the first quarter and during the second quarter of 2020, the gradual easing of the Government’s coronavirus restrictions was the main driver of the expected rise in economic activity during 2020 Q3. Most local businesses are trading again but, that being the case, the initial sharp rise in activity from businesses reopening has likely passed with economic growth rates now expected to moderate. In recent weeks, the rise in the number of Covid-19 cases has led to new restrictions having to be imposed. These are not as stringent as the full lockdown imposed earlier in the year, but could still limit economic activity in certain sectors.

2. Consumer and business behaviours likely to be more cautious
Despite the apparent rise in consumer spending during the third quarter of the year, we expect people to behave more cautiously over the new few months with regards to their spending. The increase in coronavirus infections may lead people to visit places where they would interact with people less frequently, with knock on impacts on spending levels, while uncertainty about their future job security may also lead people to hold back on making expensive purchases. Businesses are also likely to behave more prudently with regards to spending on new investment projects given the high degree of both Covid-19 and Brexit-related uncertainty.

3. Policy measures still an important source of economic support
Government policy measures have proven to be an important source of support for the economy in recent months and are expected to play an important role in the recovery from the pandemic. The Coronavirus Job Retention Scheme is set to be replaced by a new Job Support Scheme from the beginning of November while other support measures include the extension of the temporary VAT cut for hospitality and tourism businesses and changes to the Government-backed business loan schemes. These policy measures will help to limit the economic impacts of the pandemic and support the recovery, but they are not likely to prevent a sharp rise in unemployment and further fiscal policy measures may be needed over the coming months. Monetary policy is also playing a role in supporting the economy. We expect interest rates to remain at 0.1 per cent throughout the rest of this year and think that, if the Bank of England’s Monetary Policy Committee decide to loosen policy further, another expansion of the quantitative easing programme is more likely than another cut to Bank Rate.

4. Headwinds to the recovery appear to be rising
Given the events of recent weeks, the headwinds facing the economic recovery are becoming stronger and the risks around our latest forecasts are weighted much more heavily towards the downside. Unsurprisingly, the coronavirus pandemic remains the most significant risk to the local economy. The rise in Covid-19 infections has already led to new restrictions having to be imposed and if further restrictions – such as the introduction of another short lockdown period – were required, that would have implications for the economic recovery. Brexit also remains a notable risk to the economic outlook.

5. Brexit poses risks that businesses need to be prepared for
The Brexit process remains highly uncertain with less than 100 days to go until the transition period comes to an end. Our forecasts assume that the UK and the EU are able to conclude a free trade agreement but even in such a scenario, there could still be some trade frictions on the movement of goods between Great Britain and Northern Ireland from the beginning of next year. It is, however, important to note that a ‘no trade deal’ Brexit remains a possibility. For businesses, it is important that they consider the potential impacts that Brexit may have on them from the beginning of 2021 and take what steps they can to be as prepared as possible for when the transition period ends.

In summary, our base case assumption is for a gradual economic recovery from the impacts of the coronavirus pandemic. However, the headwinds facing the recovery seem to be strengthening and even in our base case, it will take some time before economic output levels return to where they were before the pandemic took hold.

This article was published on The Belfast Telegraph website on 6 October 2020.