By Conor Lambe, Chief Economist at Danske Bank
The Northern Ireland economy is still enduring challenging times, with economic growth expected to remain modest in both 2018 and 2019. In the latest Northern Ireland Quarterly Sectoral Forecasts report, Danske Bank forecasts that the Northern Ireland economy could grow by 1.0 per cent this year and by 1.2 per cent next year, both lower than the expected growth rate for the wider UK economy. We also expect the rate of jobs growth to slow. Last year, the number of employee jobs in Northern Ireland increased by 1.6 per cent. But we think that growth rate could fall to 0.4 per cent in 2018 and 0.2 per cent in 2019.
There are three key factors that are likely to drive economic performance in Northern Ireland and the rest of the UK over the remainder of this year and into next year.
Firstly, household spending power is expected to recover, but only gradually. Last year was marked by a rise in inflation as the depreciation of sterling following the EU referendum fed through into higher prices. With wage growth remaining subdued, consumers endured a severe squeeze on their spending power. The current strength of the labour market could lead to a pickup in wage growth over the next couple of years which has the potential to put upward pressure on inflation. But, overall, we think that inflation has now passed its peak and expect it to slow through 2018 and 2019. However, given that the decline in inflation is likely to occur only gradually, consumers will still face some pressure. Local consumer spending growth is projected to rise slightly, but the expected increases are still relatively modest. Consumers aren’t out of the woods just yet!
Secondly, Brexit-related uncertainty is likely to continue to weigh on business investment. In the face of a continued lack of clarity around their future, long-term access to EU markets and workers, businesses could remain reluctant to invest large sums of money in growth initiatives such as starting to sell goods and services in another territory or building new production facilities.
Thirdly, and more positively, the strength of the global economy should lead to net trade boosting economic growth. The global economy is performing well, with the US, Europe and China all posting relatively strong growth numbers. This is good news for exporting businesses, who could enjoy increased demand from elsewhere around the world for their goods and services. But this positive is not expected to be enough to offset the two factors above which are likely to hold economic growth back.
On the policy side, there have been some suggestions that fiscal austerity measures may be loosened slightly in the autumn Budget, but we think that any material reversal of this government policy is unlikely. However, the potential for change is higher when it comes to monetary policy. The Bank of England’s Monetary Policy Committee appears ready to gradually increase interest rates. We expect to see one rate hike at the May meeting, and then another one later this year.
From a sector viewpoint, the output of most sectors of the Northern Ireland economy is projected to grow over the next two years. The one exception is the public administration & defence sector which is likely to experience another two years of contraction. The three fastest growing sectors are forecast to be administration & support services, Information & communication and professional services.
On jobs, we expect the information & communication sector to enjoy the fastest rate of jobs growth this year, followed closely by the construction and administration & support services sectors. But industries such as wholesale & retail trade and finance & insurance are expected to see job losses over the next two years.
The local economy is still facing a number of risks and unfortunately, the same old problems persist – political uncertainty and Brexit. Stormont’s political stalemate is ongoing and a number of Brexit-related issues, particularly finding a way to avoid a hard border in Northern Ireland, are still to be successfully negotiated.
Overall, the picture could be worse. The economy, and most sectors within it, are expected to grow. But, ultimately, we don’t expect the Northern Ireland economy to move up into the high gears of growth this year or next year.
This article was published in The Irish News on 17th April 2018