By Conor Lambe, Economist at Danske Bank
2016 was a year of change for the global economy. The EU referendum in the UK and the presidential election in the US resulted in levels of global uncertainty exceeding those witnessed during the financial crisis. 2016 also saw the lowest growth rate of global GDP since the beginning of the decade. But looking forward, there are reasons to be optimistic about the prospects for the global economy.
The Chinese economy is expected to post growth of around 6-6.5 percent over the next two years and GDP in India is likely to increase by more than 7 percent. After contractions last year, Brazil and Russia are expected to return to growth in 2017, partly due to a rebound in commodity prices. And in the US, the world’s largest economy, anticipated tax reform and infrastructure spending is expected to lead to a pickup in economic activity over the next few years. Against this backdrop, global growth is likely to rise both this year and next.
In the UK, the economy has proved resilient following the EU referendum. Data published by the Office for National Statistics last week showed that real GDP in the UK increased by 0.7 percent in the final quarter of the year, meaning the annual growth rate for 2016 was estimated at 1.8 percent. Economic output data is not published as quickly for the regions, but we estimate that the Northern Ireland economy also enjoyed a solid performance, growing by around 1.5 percent.
This week, Danske Bank published updated economic output and employment forecasts for the local economy. We believe that both UK and Northern Ireland economic output will continue to grow in 2017 and 2018, despite the uncertainty around what Brexit will mean for the economy in the longer-term. We are projecting GDP growth of 1.6 percent in 2017 and 1.3 percent in 2018 in the UK. In Northern Ireland, we expect GVA (a measure of economic output) to increase by 0.8 percent this year and by 1 percent next year. These growth rates are lower than those observed in 2016. This is driven by uncertainty hitting business investment and higher inflation squeezing consumer spending. However, household expenditure is still expected to rise and the weak sterling should provide a modest boost to net exports.
At a local level, we think that information and communication will be the fastest growing sector, followed by the professional, scientific and technical sector and then the administration and support sector. However, Brexit-related uncertainty and corresponding reduced corporate confidence has already caused - and will continue to cause - businesses to postpone capital spending. As such, the manufacturing sector is only expected to grow modestly in 2017 and construction output is projected to fall. The outlook is relatively brighter for both sectors in 2018 as some of the terms of the Brexit deal will begin to emerge.
A weaker outlook for demand suggests that there could be a slight deterioration in the labour market in the short-term. We expect a small drop in employment levels of around 0.1 percent in 2017 and 2018 but some sectors will experience an increase in the number of jobs. We believe that the top three sectors for GVA growth will top the rankings for employment growth too.
Like any set of economic forecasts, there are a number of upside and downside risks that could impact these numbers. For example, local political instability has the potential to discourage inward investment, while there is a risk that the negative impact of Brexit on consumer and business confidence will be larger than anticipated, causing activity to falter. However, early signs of progress during the Brexit negotiations could lead to optimism that the UK will be able to reach a good deal with the EU and this could lessen the impact of uncertainty on business investment.
The UK’s vote to leave the European Union has created considerable uncertainty for consumers and businesses and this will have an impact on the economy. However, despite this, we are optimistic that Northern Ireland’s businesses will continue to push forward and consumers will keep spending. The rate may be slower than in 2016, but the Northern Ireland economy should grow again this year and next.
This article was published in the News Letter on 28th February 2017.