By Conor Lambe, Chief Economist at Danske Bank
Last week, there were a number of economic data releases that showed how the UK and Northern Ireland economies are performing. New figures were published for economic output, inflation and the labour market. At Danske Bank, we also published our latest Northern Ireland Quarterly Sectoral Forecasts report which contained our view on how the local economy might perform in 2023. But before looking to next year, it’s worth reviewing what those economic data releases told us about the current economic environment.
With regards to the output data, the UK economy is now shrinking when considered in quarter-on-quarter terms. Overall GDP in the August – October period declined by 0.3 percent when compared with the previous three months. Production output fell and services activity declined, but construction output expanded.
In Northern Ireland, the latest data showed that services output increased slightly in the third quarter of the year, by 0.1 percent. However within that, retail sales activity fell back by 1.7 percent as the squeeze on household finances exerted by high inflation, combined with low consumer confidence, likely weighed down on spending. Production output is estimated to have expanded by 0.5 percent in quarter three but it’s worth noting that production represents a smaller proportion of total economic output than services.
The latest figures showed that the rate of inflation in the UK remains elevated, even though there was a slight decline in the annual rate of price rises. The headline inflation rate fell from 11.1 percent in October to 10.7 percent in November, but that is still more than five times its target rate. Across the main categories of goods and services that consumers spend their money on, the largest annual price rises were for household energy and fuels, food and drink and furniture, household equipment and maintenance.
The labour market data for Northern Ireland remains relatively positive despite the headwinds facing the economy. The unemployment rate fell to 2.7 percent for the August – October period and the employment rate increased to 71.3 percent. The number of payrolled employees also increased over the month in November.
We are forecasting that, in annual terms, the Northern Ireland economy will grow by around 4 percent in 2022. However, it is important to note that this rate of economic expansion reflects an element of recovery from the impacts of the coronavirus pandemic.
Looking forward, there are five key factors that we expect to impact the performance of the economy during 2023, which we highlighted in our Northern Ireland Quarterly Sectoral Forecasts report:
1. We think that inflation will peak in the final quarter of this year and then decline gradually during 2023. However, we still expect it to average around 7.5 percent over the year and, as such, real income growth and household spending power are likely to remain under pressure, with annual consumer spending likely to decline in 2023.
2. In the short-term, fiscal policy will provide some support to households and businesses, particularly with regards to energy prices. However, there are some ways in which fiscal policy will tighten next year including the rise in the rate of Corporation Tax and the continued freeze in income tax thresholds.
3. The Monetary Policy Committee increased the Bank of England base rate to 3.5 percent at its December policy meeting, which was the ninth consecutive rise. While inflation is expected to peak in the final quarter of this year and decline next year, it is still projected to remain above its 2 percent target throughout 2023. We expect base rate to rise further and reach a peak of around 4 percent in the first quarter of next year.
4. The labour market is currently in a reasonably strong position. We are projecting that the unemployment rate in Northern Ireland will rise gradually but it is still expected to be relatively low when considered against the challenging economic backdrop. While this is unlikely to offset the squeeze on household spending power, it should give total consumer expenditure some support.
5. Businesses across the UK are also continuing to face trade barriers following the UK’s departure from the European Union. From a local perspective, the UK and the EU are attempting to reach an agreement on how the Northern Ireland Protocol should be implemented in the future but an imminent breakthrough appears unlikely and it is not yet clear when or exactly how the issues around the Protocol may be resolved.
The outlook for the economy next year is highly uncertain but, based on these five factors, we are forecasting that the Northern Ireland economy will contract by about 1 percent in 2023.
Consumer-focused sectors such as wholesale and retail trade, accommodation and food services and arts, entertainment and recreation are expected to experience falls in annual output next year.
The information and communication and professional, scientific and technical services sectors, which are less reliant on consumer spending, are projected to grow slightly in 2023.
The local economy is facing headwinds and with annual output forecast to decline next year, the economic environment in 2023 looks likely to be a challenging one.
This article was published in The Irish News on 20 December 2022.