By Conor Lambe, Chief Economist at Danske Bank
The Northern Ireland economy had a modest start to 2019. While there were some positives, such as another increase in the number of jobs and a rise in consumer confidence, the output data showed that the economy didn’t pick up much underlying momentum in the first quarter of the year.
Danske Bank recently published its 2019 Q2 Northern Ireland Quarterly Sectoral Forecasts report, which contains projections for economic and employment growth in 2019 and 2020. We expect the Northern Ireland economy to grow by 1.0 per cent in 2019, and for the rate of growth to pick up to 1.3 per cent in 2020. We also expect the number of employee jobs to rise by 1.3 per cent this year, but for jobs growth to slow to 0.5 per cent next year.
It’s important to note that these forecasts are based on the assumption that a no-deal Brexit is avoided and that the UK eventuallly leaves the EU with a deal.
There are three key factors which sit behind these forecasts and which we expect to influence the Northern Ireland economy over the rest of this year and into next year.
The first is that we expect to see sustained growth in household spending power. Over the last year, household spending power has increased as the strong labour market has contributed to higher rates of wage growth and inflation has come back down to the Bank of England’s two per cent target rate. As such, real wage growth is now firmly back in positive territory. We expect the rate of inflation to remain relatively stable and are forecasting that UK CPI inflation will average 1.9 per cent this year and 2.0 per cent next year. With the strong labour market also set to continue supporting wage growth over this time, we expect consumer spending growth to increase over our forecast horizon.
The second is that the boost to the economy coming from exports is likely to continue fading. The annual rate of global economic growth is expected to cool in 2019 as the impact of more protectionist trade policies are felt. This weaker rate of global growth is expected to soften the demand for exports from Northern Ireland and the wider UK.
The third is that Brexit-related uncertainty is expected to continue holding back business investment. Although firms remain in solid financial shape, they have been reluctant to invest recently. Despite returning to positive growth at the start of this year, business investment in the UK in 2019 Q1 was still 2.2 per cent below its late 2017 post-crisis peak. Uncertainty around Brexit has been a key factor behind this and business investment is likely to remain subdued until the UK’s long-term, future trading relationship with the EU becomes clearer.
With regards to the policy environment, we think interest rates are likely to remain unchanged this year but that fiscal policy could soon start to become less restrictive.
With inflation currently in line with the Bank of England’s 2 per cent target, and with economic growth in the UK still relatively modest, there is no immediate pressure on the Monetary Policy Committee (MPC) to increase interest rates in the short-term. With uncertainty around the terms of the UK’s exit from the EU persisting, we think that the MPC will wait and see how Brexit plays out before making its next move. Therefore, we do not expect any interest rate rises in 2019.
Regarding tax and public spending decisions, the UK Government currently has some headroom against its fiscal targets and so it’s possible that the Chancellor of the Exchequer will decide to loosen policy at one of the upcoming fiscal events.
From a sector viewpoint, we expect information & communication (which includes, for example, telecommunications and computer programming & consulting), administration & support (e.g. recruitment and temporary agency work) and professional services (e.g. lawyers and accountants) to be the three top performing sectors of the Northern Ireland economy, in terms of both economic output and jobs growth, in 2019. Public administration and defence continues to have the weakest outlook.
The above outlook respresents what we expect to be the most likely outturn for the Northern Ireland economy. But it’s important to note that the economy faces a number of significant risks including the possibility of a no-deal Brexit, the continued lack of a local Executive and further tariff escalations which would have an even larger negative impact on the rate of global economic growth.
Over the course of this year and next year the Northern Ireland economy is expected, on average, to continue expanding. Further economic growth, particularly given the risks currently facing the economy, would clearly be welcome. But the projected growth rates are not high enough to really set pulses racing. In short, 2019 and 2020 are expected to see a continuation of the underwhelming economic growth rates that Northern Ireland has been experiencing in recent times.
This article was published in The Irish News on 2 July 2019.