By Conor Lambe, Chief Economist at Danske Bank
Once any year begins to draw to a close, it’s natural for people to look back and reflect on the last twelve months. In stopping to consider 2020, I think we can all agree that the past year has been one unlike any other we have known. The coronavirus pandemic has had an unprecedented impact on the way we live our lives, with both wider society and the economy experiencing changes none of us could have predicted a year ago.
From an economic perspective, the pandemic has had wide-reaching consequences for households, businesses and government with all sectors of the economy impacted in one way or another. Here are some of the economic characteristics of 2020 that I believe are worthy of note.
1. The pandemic brought about a staggering recession
The Northern Ireland economy, like many others around the word, experienced a large contraction in the first two quarters of 2020 as a period of lockdown was imposed to limit the spread of coronavirus. We don’t yet have data for how the local economy performed in quarter three but in the wider UK the economy grew at a relatively strong rate. However, activity levels remained well below where they were prior to the onset of the pandemic and I believe that it was probably a similar story in Northern Ireland. After growing in the third quarter, the introduction of new coronavirus restrictions in recent weeks means that the economy will likely shrink again in the fourth quarter of the year, and when looking across 2020 as a whole, Northern Ireland is expected to have experienced a double digit decline in economic output this year.
2. Economic policy measures have provided support to people and businesses
In response to the pandemic, economic policymakers have introduced a number of measures such as the Coronavirus Job Retention Scheme, the Self-Employment Income Support Scheme and grants to businesses, at quite a considerable cost. In its latest assessment of the UK economy and public finances, the Office for Budget Responsibility projected that the fiscal measures adopted by the Government, combined with the impact of the pandemic on the economy, could lead to the budget deficit rising to around 19 per cent of GDP in this financial year, the highest it has been since towards the end of the Second World War. In time, this is likely to lead to some difficult decisions being taken around government spending and taxation but that is likely to occur at a later date, once the economy is judged to be on a sounder footing. The Bank of England also took measures to support the economy this year, with interest rates cut to an historic low of 0.1 per cent and an increase in the size of its quantitative easing programme.
3. The economy has become more digitalised
The pandemic has changed the way many of us work and spend our money. Home-working has become the norm for many people and business conferences and meetings have moved to online platforms. During April, at the height of the lockdown period, it is estimated that around 41 per cent of people in Northern Ireland were working from home, with many engaging with their work colleagues via video calls as opposed to in person. With regards to consumer spending, when measured on average across Great Britain, online sales made up about 27 per cent of all retail purchases during the first ten months of 2020, up sharply from 19 per cent in 2019. Looking forward, it’s highly likely that these trends will persist after the pandemic has passed, at least to some degree.
4. The housing market has confounded expectations
The lockdown period earlier in the year effectively paused activity in the Northern Ireland housing market. But since it re-opened in the middle of June, the performance of the housing market has been somewhat surprising. Normally, it would be assumed that a severe recession, looming job losses and high levels of uncertainty would reduce the demand for, and price of, houses. But, so far, that is not what we have seen. House prices in Northern Ireland increased by 3 per cent over the year to 2020 Q2 and by 2.4 per cent over the year to 2020 Q3. However, with unemployment expected to rise in the months ahead, more subdued confidence levels, and with the stamp duty holiday ending in March, the outlook for the local housing market in 2021 is highly uncertain.
5. Brexit uncertainty persisted
Much like in recent years, uncertainty around Brexit has been a feature of 2020. At the time of writing, there is still little clarity around what exactly will happen when the transition period comes to an end on 31 December and that, when combined with the effects of the pandemic, has made preparing for Brexit very difficult for local businesses. Nevertheless, with 2021 now fast approaching, I would encourage firms to spend some time thinking about how the end of the transition period could impact them and what preparatory steps they can take now in advance of the new year.
Looking ahead into 2021 and beyond, ‘uncertain’ still remains a fitting word to describe the economic outlook. Recent news about coronavirus vaccines has been positive but the extent of coronavirus restrictions that will be required in the months ahead is not yet known. The labour markets impacts of the pandemic have not yet fully materialised and, unfortunately, unemployment looks set to rise further over the coming months. I also think consumers and businesses are likely to behave prudently with regards to their spending decisions and some disruption related to the end of the Brexit transition period is likely.
The good news is that 2021 is expected to see the Northern Ireland economy return to positive rates of annual growth but the economic recovery from the impacts of the coronavirus pandemic is likely to be a gradual one.
This article was published in The Irish News on 8 December 2020.
