PwC warns of “two-speed recovery” as economic performance accelerates
30 April 2014Follow @PwC_NI
The Northern Ireland economy is well into recovery with all the key economic indicators pointing to further improvement, according to the latest Northern Ireland Economic Outlook (NIEO) from PwC.
The region’s manufacturing and services sectors have shown nine months of continuous improvement, but construction and retail remain depressed, with employment having fallen over the last two years.
This mixed private sector performance, combined with the UK’s highest levels of negative equity and fuel poverty, hint of a two-stage recovery where the unskilled and low-paid may not experience the full benefits of recovery.
The Economic Outlook says that one of the success stories is the local aerospace and defence sector, where already 8,000 direct jobs contribute £1billion a year of sales to the local economy and four local companies are amongst the world’s top-100 aerospace and defence contractors.
The NIEO, released today (Wednesday 30 April) says that output growth expectations from Northern Ireland’s private sector in the three months to February, grew faster than a number of other UK regions and matched the overall UK average growth for the period.
Dr Esmond Birnie, PwC’s chief economist in Northern Ireland says that, whilst the UK recovery is accelerating, Northern Ireland remains well behind other regions in terms of forecast economic growth and is not closing the gap:
“Consumer confidence is at a five-year high and there is a general sense of optimism in the local economy, nevertheless low income households have suffered disproportionally as inflation ran ahead of wages, while fuel poverty is the highest of the 12 UK regions.
“Average property prices at the end of 2013 averaged around £115,000, that’s over £3,000 more than a year previously, so the property market is coming back, albeit slowly.
“However, Northern Ireland has the UK’s highest level of negative equity and remains overly reliant on the public sector where the austerity programme is set to become even tighter.
“We are forecasting that the local economy will grow by around 2% in 2014 and 2015, which is less optimistic than some other commentators.
“However, that’s largely because were remain concerned that external factors could restrain the pace of recovery and that the economic benefits will not be distributed across the region.”
PwC says that the UK’s current account deficit is at a record post-war high and remains vulnerable to continued recovery in export markets and, in the medium term, to political uncertainties like the Scottish referendum.
It also warns that the Bank of England is still holding £375bn of bonds and gilts acquired during the period of quantitative easing (QE) and at some point the Bank will have to sell some these back - that decision may also impact on the timing and size of interest rates increases in 2015.
The most recent data suggest the UK economy grew by 0.8% in Q1, 2014, the fifth consecutive quarter of GDP growth and the longest positive run since the financial crisis. That was slightly up on the 0.7% recorded for Q4, 2013 and the overall UK economy remains still 0.6% smaller than the peak of Q1, 2008.
Esmond Birnie also says that services have been the real driver of UK recovery and local employment growth has been boosted by public sector recruitment:
“While job creation in Northern Ireland during 2013 was very encouraging, considerable employment growth came from the public sector, where both the Chancellor and Assembly Finance Minister have recently warned that the austerity programme will become even tighter.
“That suggests that further public sector recruitment and investment may be constrained, placing the onus for growth on the private sector.
“Overall therefore, whilst recovery is tangible and welcome, Northern Ireland’s recession was deeper other UK regions and that may imply that recovery will be slower and heavily dependent on a disproportionally small, internationally competitive, private sector.
“Nevertheless, claimant count unemployment is currently 6.3% as compared to the UK average of 3.4%, so we have a long way to go to recover the position we enjoyed in June 2007 when local unemployment at 2.6% matched the UK average.”
The NIEO confirms that claimant count unemployment fell by 7,500 in the year to March 2014 and that there were 15,500 more employees in employment at the end of 2013, as compared with December 2011, with the main job gains over the two years coming from in Financial and Business Services (2,640); Public Sector (2,230); and Manufacturing (1,080); Tourism & Leisure (660); and Food Processing (320).
The NIEO looks in detail at the local aerospace and defence sector which currently has around 17,600 direct and indirect employees and contributes £1billion annually of sales to the local economy.
PwC says that Northern Ireland companies perform well in the global league table with four companies in the global top-100 and a total of around 50 firms involved in sub-supply work.
Measured by annual sales, Bombardier ranks 16th, followed by Thales at number 18, with B/E Aerospace and Magellan Aerospace ranked 44th and 80th, respectively.
Collectively, PwC says Northern Ireland companies account for around 4% of the total UK aerospace and defence market, by value and contribute around £34m a year to local R&D investment.
The report endorses the Executive’s strategy to double the sales output of this sub-sector to £2bn over the next 10 years, which would drive growth in direct employment from 8,000 to 12,000. In support of this strategy, PwC says that global demand for passenger aircraft could hit $3.7trillion - 27,000 aircraft - by 2030.
Looking to the future likely direction of the economy, Esmond Birnie there is now clear evidence that Northern Ireland is well in recovery mode: unemployment is falling, new inbound investment is growing and there is a growing mood of confidence and optimism:
“The recent data confirm that NI is recovering some of the jobs, investment and economic activity lost since June 2007 when unemployment was 2.6% and broadly comparable with the UK average.
“But the data also hint at a two speed recovery; with negative equity, fuel poverty, wage erosion and lack of recovery in construction, retail and other semi-skilled and unskilled sectors, impacting on the low-paid.
“Driving the next and crucial phase of recovery, it will fall to the private sector to invest in creating internationally-competitive businesses and to the Assembly to stimulate a more entrepreneurial spirit with radical measures and daring policies.
“Getting the next phase right will determine the region’s medium-term prospects”
Email: Esmond Birnie
Tel: +44 (0)28 9041 5808
Email: John Compton
Tel: +44 (0)28 9041 5663