Danske Bank has revised up its 2017 forecast for economic growth in Northern Ireland but also warned that a squeeze on households’ spending power is still likely to slow the rate of growth in the local economy.
The Quarterly Sectoral Forecasts report, published today by Danske Bank, suggests that Northern Ireland’s economy could grow by 1.2 per cent this year and 1.0 per cent in 2018. This has been revised up from the previous report, in which growth of 0.8 per cent had been projected for 2017.
Danske Bank Economist Conor Lambe said: “There were a number of positive data releases for Northern Ireland which pointed to a very strong end to 2016. And, on the whole, the data for the beginning of 2017 suggests that the economy continued to grow during the first three months of this year. Taking all this into consideration, we have revised our forecast for economic growth in 2017 up to 1.2 per cent but we do anticipate a slight slowdown in 2018.”
He added: “Inflation has picked up in recent months and is likely to rise a bit further later in 2017 as the impact of the sharp depreciation of sterling continues to feed along the supply chain. We expect the average rate of CPI inflation in the UK to be around 2.8 per cent in 2017 and 2.7 per cent in 2018 and this will exert downward pressure on households’ purchasing power. As such, we expect consumer spending growth in Northern Ireland to slow both this year and next.
“Brexit-related uncertainty contributed to a 1.5 per cent fall in business investment in 2016 across the UK, compared with 5.1 per cent growth in 2015. Some firms have postponed capital spending until the UK’s future relationship with the EU becomes clearer and this trend looks set to continue. Therefore, we expect only a very gradual recovery in business investment over the next two years.”
The information and communication sector is expected to be the fastest growing in Northern Ireland this year (4.0 per cent), followed by the professional, scientific and technical sector (3.2 per cent) and the administration and support sector (3.0 per cent).
And despite the high level of inflation in 2017, GVA growth will be supported by the consumer focused sectors this year. The accommodation & food and wholesale & retail trade sectors are set to experience relatively strong growth of 2.9 per cent and 2.2 per cent respectively in 2017, with the latest Danske Bank Index showing consumer confidence at its highest level since the third quarter of 2015. However, growth is expected to slow in these sectors in 2018 as sustained high inflation eats into households’ spending power.
Mr Lambe said: “At a sector level, private services are expected to continue to be the main driver of economic growth. The wholesale and retail trade sector is projected to make the largest contribution to GVA growth in 2017 given its size and relatively high expected growth rate. And although the outlook for the investment related sectors remains relatively challenging, we have raised our growth expectations in light of the emerging clarity around Brexit and are now forecasting GVA growth of 1.4 per cent in the manufacturing sector and 0.6 per cent in the construction sector in 2017.”
Labour market outlook
On the back of recent labour market reports, the employment forecast for 2017 has been revised upwards, with a modest rise in employment levels of around 0.1 per cent now expected. However, the 2018 forecast remains negative, with the number of jobs projected to fall by around 0.2 per cent.
There was a spike in construction activity in the final quarter of 2016 and we expect the sector to have taken some of this momentum into 2017, so employment growth is now forecast at 0.5 per cent for 2017.
The Chancellor left fiscal policy largely unchanged in the March Budget and so the public administration & defence sector will likely act as a drag on employment growth this year.
Risks and uncertainties
There are a number of risks and uncertainties which could have implications for the Northern Ireland economy and could impact upon our forecasts. These include continued political uncertainty, Brexit and the risk of weaker than expected productivity growth.
Mr Lambe said: “Following the outcome of the UK general election, which resulted in a hung Parliament, political uncertainty is now at a more elevated level. It remains to be seen whether the new Government can bring about an increase in political stability, and indeed, what policy agenda it will pursue over the coming years.
“In Northern Ireland, the next key political milestone will be the 29th June – the deadline for the local parties to establish a working Executive. A fully functioning Executive and Assembly, and the political stability that they can bring, are important factors that contribute to the performance of the Northern Ireland economy.”