By Conor Lambe, Economist at Danske Bank
The economic data published for Northern Ireland has been a bit of a mixed bag in 2017. The Northern Ireland Composite Economic Index numbers showed that the economy was estimated to have grown by around 0.3 per cent in the first quarter of 2017. However, the Index of Services and Index of Production data both experienced falls over the quarter in the second three months of the year.
The labour market data has been a bit brighter. The unemployment rate fell slightly over the quarter to 5.3 per cent in May – July 2017, while both the workforce and employee jobs numbers suggested that employment increased in the second quarter of the year.
But what can we expect to see over the rest of 2017 and 2018? This morning, Danske Bank published its 2017 Q3 Northern Ireland Quarterly Sectoral Forecasts report. This report contains updated projections for economic growth, employment growth, inflation and the unemployment rate. It also includes expectations of output and jobs growth for nineteen sectors of the local economy. Based on the report, I have picked out five key findings that households and businesses should be aware of.
1. Economic growth is expected to remain relatively sluggish this year and next. We continue to expect that high inflation, projected to average around 2.7 per cent in 2017 and 2018, will squeeze households and weigh down on consumer spending growth. And businesses are likely to remain cautious about making significant investment decisions due to Brexit-related uncertainty. Therefore, we have kept our expectations for economic growth in Northern Ireland unchanged from our last report. We are forecasting GVA growth of 1.2 per cent in 2017 and 1.0 per cent in 2018.
2. Some sectors are expected to perform better than others. The professional, scientific and technical services sector and the information & communication sector are projected to be the two fastest growing in Northern Ireland this year. Both of these sectors also support growth throughout the UK and are expected to remain strong in the coming years despite Brexit uncertainties.
We have revised our forecast for GVA growth in the construction sector up to 1.7 per cent in 2017. Survey data from the Construction Employers Federation and BDO showed sustained growth over the first six months of the year, with around two thirds of companies operating at full or almost full capacity.
However, we have revised our forecast for growth in manufacturing downwards given that output is estimated to have fallen sharply in the second quarter of the year. We also continue to expect the public administration & defence sector to experience a contraction in both 2017 and 2018.
3. The labour market outlook is a bit more positive than it was a few months ago. In our last report, we forecast that employment levels would rise by 0.1 per cent in 2017 but then fall by 0.2 per cent next year. However, given the recent, relatively strong, labour market data, we now expect employment growth of 0.8 per cent in 2017 and that the number of jobs will remain largely flat, rather than fall, in 2018. We are projecting that information & communication, professional, scientific and technical services and construction will experience the fastest increases in employment levels this year.
4. A rise in interest rates appears to be just around the corner. The Bank of England’s Monetary Policy Committee voted by a 7-2 majority to keep interest rates at 0.25 per cent at its September meeting. However, the Committee suggested that ‘some withdrawal of monetary stimulus is likely to be appropriate over the coming months.’ Given further hawkish statements from Bank of England policymakers, we have revised our previous expectation of rates remaining on hold until 2019. We now expect an interest rate rise to occur before the end of the first quarter of 2018, with an increase to 0.5 per cent in November 2017 a distinct possibility.
5. Considerable uncertainty still exists around Brexit. It appears that some progress was made during the fourth round of Brexit negotiations in September, but there are still significant challenges to overcome. At the European Council meeting in October, the EU’s political leaders will determine if sufficient progress has been made on separation issues such that discussions can move onto the terms of the future relationship. While there will undoubtedly be some bumps in the road, ultimately, we still believe that a deal on transition and separation is more likely than not, and that a multi-year transitional period from 2019 will eventually give way to the UK and EU cooperating under the terms of a free trade agreement.
In short, the latest report contains some good news, particularly related to the labour market and certain sectors of the economy. But, given the impact of high inflation on consumer spending and the impact that Brexit is having on businesses’ investment decisions, economic growth in Northern Ireland is likely to remain subdued over the next couple of years.
This article was published in The Irish News on 3rd October 2017.