By Conor Lambe, Economist at Danske Bank
It is almost a year to the day since the UK voted to leave the European Union and much has happened since the 23rd June 2016. Theresa May took the reins at Downing Street, the devolved administration in Northern Ireland collapsed and we had a local Assembly election. Following that, the UK Government triggered Article 50, formally notifying the EU of its intention to leave, and voters went to the polls again just a few weeks ago with the Conservatives losing their parliamentary majority following the general election. It really is uncertain times in which we are living.
Despite all this, the UK economy has come through the last year in a better position than many people had initially expected. The economy has continued to grow and the national labour market looks to be in reasonably good shape. However, the depreciation of sterling has posed a challenge by contributing to the return of inflation.
In Northern Ireland, there were a number of positive data releases which pointed to a very strong end to last year. The Northern Ireland Composite Economic Index release suggested that economic growth in Northern Ireland surpassed that in the UK in the final quarter of 2016. And the workforce jobs data showed an increase in the number of jobs in Northern Ireland in the final three months of 2016.
On the whole, the data for the beginning of 2017 suggests that the economy has continued to grow. The workforce jobs data did show a slight fall, though from a relatively high level, and the Index of Production witnessed a fall over the quarter but increased over the year to 2017 Q1. The Index of Services signalled a rise in service sector activity both over the quarter and the year while the Danske Bank Northern Ireland Consumer Confidence Index showed a rise in confidence levels at the start of 2017.
So what are the prospects for the economy during the rest of this year and 2018? Today, Danske Bank published its Northern Ireland Quarterly Sectoral Forecasts report for the second quarter of 2017 and it highlights two headwinds on the horizon for both the UK and Northern Ireland economies.
The first is the impact of high inflation on consumer spending. Last week’s data showed that inflation in the UK now stands at 2.9 per cent, significantly above the Bank of England’s 2 per cent target. As such, real wage growth is now in negative territory and households are feeling the pinch. This means that consumer spending growth is likely to slow, and given that household spending accounts for over 60 per cent of UK GDP, this will have a material impact on overall economic growth.
The second is the impact of Brexit-related uncertainty on business investment, which fell by 1.5 per cent in 2016. Looking forward, many day-to-day investments, such as a business buying a new piece of machinery to improve efficiency and reduce costs, will likely still go ahead. Particularly at a time when the weaker currency is putting costs under the spotlight within a number of organisations. However, long-term strategic investments such as deciding where to build a new production facility, or which economy to begin exporting to, may be postponed as businesses wait for more clarity around the UK’s future relationship with the EU, and possibly other economies further afield too. Therefore, business investment is expected to recover only gradually over the next couple of years.
Taking account of these factors, Danske Bank is forecasting GDP growth of around 1.7 per cent in the UK in 2017, marginally lower than the 1.8 per cent growth observed last year. However, growth is expected to slow further to 1.4 per cent in 2018.
In Northern Ireland, the pattern is broadly similar with the economy expected to grow by 1.2 per cent in 2017. This number has been revised up from the 2017 Q1 forecast of 0.8 per cent in light of the data covering the end of 2016 and the start of this year. But growth is expected to slow with the economy projected to expand by around 1.0 per cent in 2018. The fastest growing sector in the local economy in 2017 is expected to be information & communication, followed by the professional, scientific & technical sector and then administrative and support services.
As with all economic forecasts, there are a number of risks and uncertainties which could impact upon these projections. These include the impact of political uncertainty, the Brexit process and the progress made during the negotiations and the risk of weaker than expected productivity growth.
The last twelve months can be characterised by high levels of uncertainty. But the economy has come through this period in better shape than had been expected. In 2017 and 2018, economic activity is expected to grow in the UK and in Northern Ireland, but given the challenges posed by high inflation and uncertainty, it is likely that economic growth will slow.
This article was published in The Irish News on 20th June 2017.