By Conor Lambe, Chief Economist at Danske Bank
Over the remainder of 2019 and into 2020, the Northern Ireland economy is likely to find itself relying on consumer spending as the main driver of growth. That’s not just because consumer expenditure is the biggest component of economic activity, like it is in most advanced economies, but because the other drivers of the economy are not firing on all cylinders.
Uncertainty over the UK’s exit from the European Union is likely to continue acting as a drag on business investment, and the weaker pace of global economic growth looks set to pose a challenge to exporting businesses.
Consumers appear to be better placed to support the economy now than they have been in recent years. The strong labour market has led to higher rates of wage growth and inflation has moderated. Therefore, real wage growth – a useful measure of people’s purchasing power – is currently well into positive territory.
An important determinant of consumer spending growth is how willing people are to convert purchasing power into actual increases in spending, which we can gain some insight into by understanding how confident consumers are feeling.
This morning, Danske Bank published its Q3 2019 Northern Ireland Consumer Confidence Index. The study showed that consumer confidence fell between the second and third quarters of 2019, but was higher in Q3 2019 than it was a year ago.
Focusing on the change over the quarter, the respondents to our survey said they felt less confident about their current financial position, their future finances and their job security. Expectations around future spending on high value items, such as furniture and holidays, were unchanged compared with the second quarter of the year. People also told us they felt less confident with regards to their saving expectations than they did three months previously.
There were a number of reasons why sentiment fell in the third quarter. One of the most significant was Brexit. Twenty-three per cent of people said that progress during the Brexit negotiations in recent months had negatively affected them and an additional 9 per cent said the UK Government’s longer-term Brexit objectives weighed on their confidence levels. That compares with 7 per cent and 4 per cent respectively who said that those same two factors impacted them positively.
The Brexit process remains highly uncertain, with the last number of weeks having brought a number of twists and turns. But it’s important to remember that this is just the first phase of the Brexit talks. Assuming a deal is eventually ratified, the UK and the EU will then begin negotiating their future, long-term relationship. That is a process which could take a number of years to complete, so Brexit is likely to remain an influencing factor for consumers, and the wider economy, for some time yet.
Another aspect behind the fall in confidence was the local political stalemate. Earlier this month, Northern Ireland hit the point at which it had been without a functioning devolved government for 1,000 days. Businesses and consumers have been very clear that this is a real challenge and it is therefore vital that the Executive is restored as soon as possible so that Northern Ireland does not remain trapped in this policymaking vacuum.
In addition, some 17 per cent of people blamed the impact of higher prices on household finances as the main factor making them feel less confident. That is despite inflation now being below the Bank of England’s 2 per cent target – the rate in September was 1.7 per cent.
Despite the fall in confidence, local people did point to a number of things that had a positive impact on them. One in five people highlighted rising wages. The relatively high rate of wage growth is due to the strength of the labour market – a trend also being mirrored in the wider UK. However, while the latest Quarterly Employment Survey in Northern Ireland did show an increase in the number of jobs in the first half of this year, the pace of job creation appears to be slowing.
Other positive factors highlighted included low interest rates and rising house prices. The Bank of England’s base rate remains low by historical standards at 0.75 per cent, and we expect it to remain there for the rest of this year. While the most recent house price data showed that, over the year to Q2 2019, house prices in Northern Ireland increased by 3.5 per cent.
Looking forward, it’s clear that the outlook for consumer confidence is highly uncertain. But one thing we can be reasonably sure of is that political events, both at Stormont and in Westminster, are likely to have a significant impact on the confidence levels of local people in the weeks and months ahead.
This article was published on The News Letter website on 29 October 2019.