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Economics

Belfast Talks Business: what’s in store for Northern Ireland in 2022?

Amid the challenges of the pandemic, rising inflation, supply chain disruption and Brexit uncertainty, Ulster Bank Chief Economist Richard Ramsey spoke to the Belfast Chamber of Trade and Commerce about where the Northern Ireland (NI) economy might be heading in 2022.

An unbalanced recovery

The NI Composite Economic Index – the nearest thing Northern Ireland has to quarterly GDP – recorded growth in Q3 2021 of 1.5% quarter on quarter and 4.6% year on year.

This is not only back above pre-pandemic levels but a 13-year high. The time it has taken to get back to pre-pandemic levels has been much shorter than many economists initially thought.

Recovering lost output from the pandemic is an important milestone. But a recovery in overall output conceals an unbalanced recovery at a sub-sector level.

Some Covid-19 “winners”:

  • Manufacturing of chemical and pharmaceutical products (30.3%)
  • Textiles, leather and related products (15.4%)
  • Rubber plastic and non-metallic mineral products (13%)

Some Covid-19 “losers”:

  • Transport equipment (-40.3%)
  • Computer, electronic, electrical and optical products (-16.8%)
Labour market tightens

NI represents the strongest employment growth of any UK region, alongside the North East. There were nearly 20,000 more people on NI payrolls in December 2021 than there were during the pandemic.

Job vacancies are also at a record high. Most employment categories (24 of 31) have seen job listings soar, including:

  • IT
  • Nursing, healthcare and medical
  • Hospitality
  • Accountancy and finance

In a NI Chamber of Commerce survey in Q3 2021, 66% of firms said they were trying to recruit, and of those, 80% had experienced recruitment problems.

Given that self-employment remains well below pre-pandemic levels largely explains the fact that total hours worked in NI is still 6.3% below the pre-pandemic high of 30.2 million hours in September – November 2019.

For a full labour market recovery to be declared, the total number of hours worked will need to return to pre-pandemic levels.   

Looking ahead, the big issue will be not unemployment rates but rates of pay.

Supply chain disruption slows down growth

One indicator that analysts rarely looked at before the pandemic is supplier delivery times and the Purchasing Managers’ Index (PMI) index. We’re still seeing significant lengthening in supply chains, which is causing problems with output.

Although it’s expected to fade this year, supply chain disruption has lasted much longer than economists thought it would.

Inflationary pressures on local firms

The key challenges facing businesses continue to be on the inflationary front, particularly around the rising costs of raw materials, energy and freight.

Firms are having to pass on these price rises for their goods and services. These cost pressures mean a squeeze for many businesses on profit margins and profitability.

The cost-of-living crisis

There are some similarities and differences compared to the aftermath of the financial crisis in 2008.

After the financial crisis, the unemployment rate rose to more than 8% (it’s 3.1% currently), and people were relatively passive in terms of asking for pay rises – people were thankful to have a job.

This time round, there is pressure to increase wages. Recent news items reflect concerns around a squeeze in disposable income and a poverty surge in Northern Ireland.

The number of households in poverty could increase by 67%, and Northern Ireland would be the most adversely affected of all UK regions. Key cost pressures include:

  • The price of oil, which is over 50% above pre-pandemic levels
  • Petrol prices, which are at a record high
  • Diesel prices, which are at their highest since April 2012
  • SSE Airtricity’s confirmation that electricity prices will rise by 3.9% from 1 March
  • Further rises to gas prices
  • Private rents, which are running at 3.4% year on year in NI
  • A predicted rise in the inflation rate to more than 7%
The Northern Ireland Protocol: the positives and negatives

One year on from the Northern Ireland Protocol, which stipulated no new checks on goods crossing the border between NI and the Republic of Ireland (ROI), businesses are adapting to EU trading arrangements and embracing new opportunities.

Some firms, notably within the food and pharma sectors, are enjoying the best of both worlds.

Data from a NI Chamber of Commerce and BDO NI survey in Q4 2021 found:

  • One in 10 local firms report a positive impact
  • 57% of NI firms are adapting to new arrangements

But for others, such as those manufacturers who trade exclusively with NI and/or Great Britain, it is the case of more administrative pain with little or no (trade) gain:

  • 36% of firms are finding the new rules challenging
  • 62% of NI firms state a negative impact from the EU exit

Brexit always meant new borders, additional costs and more bureaucracy. No amount of finessing of the NI Protocol will change this – it will only smooth some of the rougher edges that Brexit has created. 

The emergence of new trade patterns

Data from the Central Statistics Office shows firms are adapting to the NI Protocol. From January to November 2021:

  • Exports from NI to ROI increased by 64%
  • Goods from ROI to NI increased by 48%
  • GB exports to ROI decreased by 21%
  • ROI exports to GB increased by 20%
Trade gains for NI and ROI

As reported in a recent Belfast Chamber of Commerce survey, 23% of businesses that were exporters or were aspiring to export have brought their supply chains back to NI. Meanwhile, two thirds have diversified their suppliers, with 60% of those swapping GB suppliers for those in in the EU, primarily ROI.

These are gains for the region that are set to continue.

The super-deduction investment boost

On 3 March 2021, to help with the economic recovery from the pandemic, Chancellor Rishi Sunak announced the super-deduction allowance. This tax incentive for business investment enables a business to claim back up to 25p for every pound it invests in ‘qualifying’ machinery and equipment until April 2023.

This should stimulate a significant increase in investment. That is something NI in particular needs because businesses in the region are serial under-investors.

The outlook for 2022
  • A year of shortages around skills, goods, energy, housing
  • A cost-of-living crisis, particularly affecting consumer-sensitive sectors
  • A cost-of-doing business crisis amid rising taxes, the National Living Wage, energy and food costs
  • More tax and higher interest rates
  • Possible discontent and industrial action
  • Businesses adapting to the post-Brexit/post-pandemic world
  • Increased trade between NI and ROI
  • An investment boom from the super-deduction tax incentive
  • Potential political instability at home and abroad (Ukraine, Taiwan)

This material is published by NatWest Group plc (“NatWest Group”), for information purposes only and should not be regarded as providing any specific advice. Recipients should make their own independent evaluation of this information and no action should be taken, solely relying on it. This material should not be reproduced or disclosed without our consent. It is not intended for distribution in any jurisdiction in which this would be prohibited. Whilst this information is believed to be reliable, it has not been independently verified by NatWest Group and NatWest Group makes no representation or warranty (express or implied) of any kind, as regards the accuracy or completeness of this information, nor does it accept any responsibility or liability for any loss or damage arising in any way from any use made of or reliance placed on, this information. Unless otherwise stated, any views, forecasts, or estimates are solely those of the NatWest Group Economics Department, as of this date and are subject to change without notice.

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