For Northern Ireland, reflecting on 2024 would show us the restoration of the Executive, a reasonable economic performance and resilience in the face of domestic and global challenges. Some data would suggest Northern Ireland outperformed the overall UK economy last year.

In the year ahead, I expect the pace of economic growth to pick up, partly from an increase in government spending following the announcements in the UK Budget.

Annual inflation is expected to remain lower than in recent years and interest rates are widely anticipated to continue to move downwards. However, the effects of previous price and interest rates rises are set to linger, and the impacts of the Budget on businesses’ costs may influence investment and growth potential.

I’ve considered five key factors that could shape the local economic landscape in 2025: interest rates and inflation, political stability, global developments, labour market shifts and house prices.

Inflation is lower than in recent years, paving the way for continued interest rate cuts at a gradual pace

Inflation has crept up in recent months, which means prices are rising slightly more quickly and this presents risks to the economic outlook and uncertainty around near-term interest rate movements. But overall it is much lower than in recent years and remains reasonably close to its 2% target.

Underneath the headline inflation figure there have been some variations in price movements over the past year. While the price of furniture on Christmas wish lists may have been lower than it was around the end of 2023, price rises for a restaurant meal and an overnight stay were ahead of the overall average inflation rate.

Our latest Danske Bank consumer confidence index for Q3 2024 showed that lower inflation supported sentiment, although the lingering impacts of high prices and interest rates continued to weigh on confidence.

Further gradual base rate reductions are expected in 2025, which would provide support to household spending. But people and businesses will need to continue to adapt to an environment with interest rates higher than experienced over much of the past 15 years.

Political stability in Northern Ireland sets the scene for long-term policy focus, but the Budget might bite

The restoration of a devolved government brought stability and the unified presence on an international stage has been well received. The creation of a Programme for Government outlined priorities that could serve to increase long-term growth potential, but as with all policy, implementation is at least as important as the development stage.

The UK Budget’s allocation of additional funding for Northern Ireland, totalling around £1.5bn in 2025/26, will help address some immediate needs, but public finance pressures will persist.

To fund increased UK-wide spending, the UK government will borrow more, and tax more, with most of the increased taxes falling on businesses. Potential economic impacts following the tax rise could include businesses raising prices, scaling back on wage increases and recruitment, or investing less. These impacts risk weighing down on the pace of economic growth.

Global uncertainty brings downward risks to the outlook, but opportunities are present

The international economic backdrop remains volatile. Geopolitical uncertainty is currently elevated given the war in Ukraine and events in the Middle East. Numerous elections in 2024 have introduced temporary policy uncertainty in countries such as the US and some EU nations including Ireland - important trading partners for Northern Ireland. Globally, risks are tilted towards increasingly protectionist trade policies.

While the OECD’s latest forecasts for 2025 suggest that global growth is set to maintain a broadly similar pace to 2024, structural changes are expected. Germany could see some recovery, China is unlikely to regain its pre-Covid momentum and the US economy could slow slightly.

Beyond immediate risks there are global opportunities. Displaying the success of Northern Ireland’s businesses on a global stage and leveraging our dual market access could help support businesses and inward investment.

Labour market dynamics show underlying challenges:

Northern Ireland’s labour market remains resilient, with unemployment particularly low throughout 2024 and expected to remain low in 2025. However, underlying challenges exist, including high economic inactivity which has been exacerbated by a post-pandemic increase in inactivity due to sickness.

Skills shortages remain a key issue, with the NI Chamber and BDO quarterly economic survey consistently reporting recruitment difficulties across the manufacturing and services sectors.

Policy should be used to actively support the labour market going forward.

Targeted government spending in healthcare would provide a means to boost labour market participation over the longer-term. And future-focused skills development could better match people to jobs.

Housing market could continue to show resilience

House prices in Northern Ireland have experienced continued annual growth despite the challenging economic environment. Over the year to Q3 2024, prices rose by 6.2% despite the higher interest rate environment over the past few years. Supply shortages are likely to have provided upward support to prices.

In 2025, Northern Ireland is projected to see economic growth increasing, interest rates moving downwards and inflation remaining closer to target. These economic conditions are favourable for continued resilience in house prices.

Looking forward:

The Northern Ireland economy has entered 2025 in a reasonable position. Economic activity increased last year and the labour market remained relatively strong. Businesses continued to show considerable resilience and consumers maintained a reasonable level of confidence. Political stability at Stormont meant a renewed focus on policy development.

However, some challenges remain. The lingering impact of high prices, elevated interest rates and risks from global factors could all weigh on overall economic activity. While I am optimistic for a reasonable economic performance this year, it’s clear these factors are still weighing on growth.

Northern Ireland’s success in the coming year, and beyond, will depend on continued business and consumer resilience, and a political balance between addressing short-term pressures and investing in a long-term vision that prioritises skills, innovation and infrastructure.