By Conor Lambe, Chief Economist at Danske Bank
The end of 2020 and the beginning of 2021 have been a challenging time for the Northern Ireland economy. Economic output fell in the final quarter of last year due mainly to the restrictions needed to limit the spread of coronavirus, with tougher rules introduced from October, culminating in the lockdown that started on Boxing Day and remained in place throughout the first quarter of 2021.
At the start of this year, and across the whole of the UK, the stringent coronavirus restrictions led to a 2.9 per cent drop in GDP in January. We don’t yet have official data showing us the effects of these restrictions on the local economy, but it is very likely that they will have led to another contraction in economic activity in the first quarter of the year.
However looking forward, there is some hope that the economic recovery may soon be about to restart. At Danske Bank, we have recently published our 2021 Q1 Northern Ireland Quarterly Sectoral Forecasts report, outlining our latest projections for economic growth and the labour market in 2021 and 2022.
We are forecasting that the Northern Ireland economy will grow by around 4.8 per cent in 2021, up from the forecast of 4.0 per cent at the time of our last report in January. We then expect the local economy to grow by about 5.8 per cent in 2022, with overall economic activity returning to its pre-coronavirus level in the second half of next year.
For the wider UK economy, we expect GDP to rise by around 5.0 per cent this year and by 6.0 per cent next year.
Coronavirus-related factors are expected to remain the key determinant of economic growth. Since the start of this year, coronavirus case numbers have reduced significantly and the rollout of the vaccine programme has progressed well. While I expect the unwinding of the current restrictions to proceed cautiously, I think that the gradual reopening of the economy will see economic output begin to grow again from the second quarter of 2021 onwards.
Economic policy measures will also play a role in the recovery. The Coronavirus Job Retention, or Furlough, scheme has been extended until September 2021 and other measures, including the super-deduction aimed at encouraging businesses to bring forward investment and a Recovery Loan Scheme to provide firms with access to finance to support their expansion out of the pandemic, have been introduced.
In Northern Ireland, the Department for the Economy has published its Economic Recovery Action Plan which includes measures to support skills development, R&D and innovation, investment and exports, and the transition to a greener economy.
It’s also important to note that it’s not just fiscal policy expected to facilitate the recovery – the monetary policy environment also remains supportive with the Bank of England’s Monetary Policy Committee voting to maintain Bank Rate at its historic low of 0.1 per cent at its March 2021 meeting. We expect the rate to remain at this level throughout the rest of 2021.
However, while the gradual easing of the coronavirus restrictions and policy measures are likely to be supportive of growth, there are other factors that are expected to hold back the pace of the recovery.
Despite the policy support in place, the Northern Ireland labour market has still weakened. The Quarterly Employment Survey for December 2020 showed the third quarterly decline in the number of employee jobs in succession. We expect greater job losses to occur this year as the full labour market impacts of the pandemic begin to materialise. Overall, and after a decline of 0.2 per cent last year, we are forecasting that the annual average number of employee jobs in Northern Ireland will decline by a further 1.9 per cent in 2021, before returning to growth of around 1.0 per cent in 2022.
We may also continue to see cautious consumer and business behaviours due to ongoing uncertainty related to the coronavirus pandemic. Overall consumer spending in Northern Ireland is expected to increase this year – Danske Bank is forecasting growth of 5.0 per cent in 2021 – but with unemployment expected to rise, some people are likely to behave more prudently with regards to how much they spend over the coming months. Some businesses may also prefer to prioritise rebuilding cash reserves and paying down debt rather than spending on new investment projects.
Firms are also still working through the impacts of the new, post-Brexit trading arrangements. The new arrangements have created challenges for local firms bringing some goods into Northern Ireland from Great Britain and it will take time for them to adapt to the new processes involved with moving these goods. Likewise, it is also expected to take time before businesses that have identified opportunities arising from the new arrangements are able to fully bring these to fruition.
Of course, there are still a lot of risks and uncertainties surrounding the economic outlook, with the pandemic remaining the most significant risk. Considerable uncertainty still exists around how the re-opening of the economy will impact coronavirus case numbers and the pace at which the restrictions can be eased. The emergence of new variants of the virus is also a significant risk and could impact the unwinding of the restrictions, or potentially lead to restrictions needing to be reintroduced later in the year.
The last few months have been another tough period in what has been an extremely challenging year for the Northern Ireland economy. But with coronavirus case numbers now lower than they were, and with the vaccine programme continuing to be rolled out, there is some hope that the economic recovery will soon be able to take hold.