Danske Bank has upgraded its forecasts for economic growth in Northern Ireland, but also warned that household spending power will increasingly come under pressure from higher inflation in 2017.
The Quarterly Sectoral Forecasts report, published today by Danske Bank, suggests that Northern Ireland’s economy will grow by 0.8 per cent this year and 1.0 per cent in 2018. This has been revised up from the previous report, in which growth of 0.5 per cent had been projected for this year.
While Danske Bank has raised its forecasts, the rate of growth expected in the coming years is below the 1.5 per cent estimated for 2016, which was the strongest rate of growth since 2007.
Danske Bank Economist, Conor Lambe said: “The post-referendum picture is still emerging and will continue to do so over the coming quarters. We have revised our forecast up slightly from the last quarterly forecast as the economy has performed better than expected following the outcome of the EU referendum.
“A weaker outlook for demand suggests we might see a slight deterioration in the labour market over the short-term. There are also a number of downside risks which could lead to lower growth than we are currently forecasting, including political instability and a larger than expected negative impact on confidence as a result of Brexit.
“We think that consumer spending will continue to rise in the years ahead, albeit at a lower rate than last year. And the weaker pound will offer a modest boost to net exports.
Therefore, we expect the Northern Ireland economy to continue growing over the next couple of years. ”
At a sector level, private services are expected to continue to be the main drivers of growth. The information and communication sector is expected to be the fastest growing in Northern Ireland this year (4.4 per cent), followed by the professional, scientific and technical sector (3.3 per cent) and the administration and support sector (2.8 per cent). The wholesale and retail trade sector is forecast to make the biggest contribution to overall GVA growth in 2017.
Mr Lambe said: “The consumer focused sectors are forecast to continue their momentum from 2016 into 2017. However, this will be short-lived as higher inflation will have a negative impact on household purchasing power. Inflation has already started to accelerate and this is likely to continue through 2017 as the impact of a weaker sterling makes its way along the supply chain.
“The outlook for investment orientated sectors remains relatively weak. While the Prime Minister’s speech in January provided some details around the Government’s plan for Brexit, there is still a lot we don’t know, including what access UK-based businesses will have to EU markets in the future and when a formal separation from the EU will actually take place. This uncertainty will continue to cause businesses to postpone some capital spending, disproportionally damaging the manufacturing and construction sectors.”
Labour market outlook
A weaker outlook for demand suggests that there will be a slight deterioration in the Northern Ireland labour market over the short-term. Employment levels are expected to fall by around 400 jobs in 2017, equivalent to a contraction of 0.1 per cent. Modest job losses are expected to continue in 2018 with the further loss of around 1,000 jobs, given the uncertain economic conditions.
Risks and uncertainties
There are a number of risks which could have implications for the Northern Ireland economy. These include political instability, a larger than expected Brexit-related impact on consumer and business sentiment and further austerity.
Mr Lambe said: “There is uncertainty around the impact of Brexit and what it means for the local economy and that is something that is not going to change anytime soon. The only thing we do know for certain is that change is coming. For a number of businesses across Northern Ireland, the loss of access to the EU single market and potential future barriers to cross-border trade are major concerns. Businesses should be thinking through the implications of different scenarios now so that they are ready to act once the terms of the Brexit deal become clear.”
• The ‘Quarterly Sectoral Forecasts’ report is published by Danske Bank in conjunction with Oxford Economics. The report provides a continuous assessment of the performance of key sectors in the Northern Ireland economy.
• Economic activity or output is measured by Gross Value Added (GVA).