Commentary
Mid-year assessment – that lagging feeling
by Alan Bridle, head of Economics, Bank of Ireland A
s we approach mid‑year, any assessment of the performance of the local economy since the start of 2010 would inevitably be of the sober variety. In December, in a look ahead to the next 12 months, I was of the view that Northern Ireland, for the most part, would be in something of a “twilight zone” – in a technical sense the economy may have stopped retreating but with little evidence of regaining forward momentum. The experience and the data from recent months have only served to cement this view. On a more encouraging note, there have been some very stellar performances in recent times, notably in food, utilities, healthcare and IT. The latest figures would also suggest that the manufacturing sector has passed its trough and is positioned to benefit from the pick‑up in global growth. However, while the UK has now enjoyed consecutive quarters of expansion and there are expectations of export‑led growth in the Irish Republic during H2, a number of indications suggest recovery is lagging in this region –
• Unlike the UK overall, the jobless trend remains upward with the claimant count unlikely to peak until at least 60,000
• In the business market, the number of insolvencies is following a more typical recession pattern and if Q1 data is a sign of things to come, the 2010 total could rise to c 400 (2009: 247). Comparable figures for England and Wales suggest the peak in business failures has already passed.
• In the residential market, while there are some signs of stabilisation in average prices, the volume of completions continues to disappoint.
Why?
A number of regional‑specific factors seem relevant including –
• The sub‑scale (and unbalanced) private sector with a very limited export base. Those companies that are connected to the faster growing parts of the global economy are doing better but those with domestic‑only sales are competing for a slice of a smaller cake and facing real demand challenges, particularly for new orders. Not surprisingly, price discounting and margin attrition are strong features for many firms.
• The hangover from the property and construction boom of 2005‑07 is lingering. While there are hopeful signs of a slight acceleration in the rate of housebuilding, the biggest concern now is the tailing off in major infrastructure projects, as capital budgets are sliced.
• The proximity to the Irish market. The Republic represents Northern Irelandʼs single largest export market and the deep downturn has had spill‑over effects. Even the boost to cross‑border retailing during 2009 is now fading as the exchange rate, costs and prices realign.
• An (over) reliance on credit in the structure of business finance during a period of deleveraging and reduced levels of debt. Research consistently shows small firms in particular in Northern Ireland are less dependent on private equity or their own savings to finance the business.
• A sense of foreboding about the looming squeeze on public expenditure, impacting on behaviours including postponing investment decisions, an increase in precautionary savings and reduced demand for credit.
Prospects
Looking ahead, the growth forecast for 2010 remains unchanged at a fairly anaemic +0.5 per cent. By the autumn and the CSR, we should have more details on the path of UK deficit‑reduction and the potential squeeze on the local economy from 2011/12.
Times of austerity will present both challenges and opportunities – the possibility of beginning the long‑term rebalancing of the economy and re‑shaping the provision of public services and a greater role for private companies in delivering public services. The recovery in the world economy allied to a more competitive exchange rate may also encourage a shift in resources to the tradable sector. Furthermore, it is possible that the more austere times we face could be the catalyst for a more entrepreneurial culture in the local economy when the cost and stigma of “business failure” may be lower – even in these challenging days, new business formations are running at just under 1,000 per quarter.
For existing Northern Ireland firms, the prospects are as mixed as the economy. The winners are likely to be those with strong balance sheets and a high percentage of turnover outside the region. Domestic market‑only providers are only likely to grow at the expense of others and typically, with strategies driven by price.
Planning assumptions
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