By Conor Lambe, Chief Economist at Danske Bank
This week, Danske Bank published its latest Northern Ireland Quarterly Sectoral Forecasts report, outlining our expectations for economic growth and the local labour market in 2018 and 2019.
In the second quarter of the year, we saw an anticipated pick-up in economic growth as the temporary factors that dragged on the economy in the first quarter of the year, such as the bad weather, came to an end.
However, with above-target inflation continuing to exert pressure on consumers’ purchasing power, and Brexit-related uncertainty weighing on business investment, we expect overall growth in 2018 to remain relatively subdued at 1.0 per cent, with only a marginal increase to 1.1 per cent next year.
The three fastest growing sectors in Northern Ireland this year are projected to be administration & support services, information & communication and professional services. Public administration & defence is the only sector we expect to contract significantly in 2018.
So, what are the key factors influencing the Northern Ireland economy? What is the outlook for the local jobs market? And what about interest rates?
Here are some of the key things you need to know from our latest report.
1. Household spending power is expected to recover gradually, but consumers remain under pressure
Inflation averaged 2.7 per cent in 2017, its highest rate in five years, causing a severe squeeze on household spending power. But inflation slowed in the early part of this year as the impact of the 2016 sterling depreciation faded. Since then, higher oil prices, rises in domestic energy bills and a renewed weakness in sterling have all applied upward pressure to inflation and contributed to increases in the headline inflation rate over the summer.
Despite the rise observed recently, and the potential for inflation to bounce around its current rate somewhat over the short-term, the general trend over the next 12-18 months is still likely to see inflation coming down. We expect CPI inflation to average 2.5 per cent this year, and then to slow to 2.2 per cent in 2019. This expected fall in inflation would ease the pressure on household budgets, but it is projected to be a gradual process and so consumer spending growth in Northern Ireland is likely to remain relatively low.
2. Brexit-related uncertainty is continuing to weigh on business investment
While corporate profitability currently remains firm, investment intentions are subdued with Brexit-related uncertainty weighing negatively on investment decisions. We expect growth in business investment to remain relatively modest given the lack of clarity regarding Brexit and the UK’s long-term trading relationship with the EU.
3. The Northern Ireland economy is set to continue adding jobs
Despite the subdued economic growth environment, the labour market in Northern Ireland continues to surprise on the upside with data from the Quarterly Employment Survey pointing to a strong first half of the year. The latest data for the second quarter of 2018 showed the number of jobs up by more than 2 per cent compared to the same period in 2017. Therefore, we have revised our forecast for employee jobs growth upwards to 1.8 per cent in 2018 and 0.5 per cent in 2019.
4. One interest rate rise is expected in 2019
As anticipated, the Monetary Policy Committee (MPC) voted to raise interest rates to 0.75 per cent at its August meeting, and unanimously voted to keep them unchanged at the September meeting. Though it suggested that its August Inflation Report forecasts remained on track, the committee stated that the degree of downside risk had increased due to rising concerns about global growth and increased Brexit uncertainty. The MPC continues to signal that further interest rate rises are likely, but that increases will take place at a gradual pace. Against this backdrop, we expect no further changes to interest rates this year and just one 25 basis point increase in 2019.
5. Brexit is the most significant risk facing the economy
It is now just under six months until Brexit formally occurs. However, the UK and EU have still not reached a Withdrawal Agreement that would see the UK leave the European Union in a managed and orderly way.
In recent weeks, the Brexit process has entered a particularly tense period given the outcome of the informal EU summit in Salzburg, the Labour and Conservative party conferences and the close proximity of the October European Council meeting.
We continue to think that the UK and EU will eventually reach an agreement. However, at this stage it is unfortunately not yet possible to rule out a ‘no deal’ Brexit taking place in March 2019. A ‘no deal’ Brexit would undoubtedly lead to negative economic consequences for both Northern Ireland and the wider UK and, as such, it is the most significant risk facing the economy at this time.
In short, while there are some positives to note, such as the pick-up in growth in the second quarter and the strong labour market data, the performance of the Northern Ireland economy is still subdued. With inflation likely to remain above the Bank of England’s 2 per cent target for some months yet, and Brexit uncertainty taking its toll, we look set to remain in a period of modest economic growth over the rest of 2018 and into next year.
This article was published in The Irish News on 9th October 2018.