Rising costs dominate the economic picture for Northern Ireland: March 2022

Inflation worries and the war for talent shouldn’t overshadow economic strengths in key sectors. Richard Ramsey, Chief Economist at Ulster Bank, explains.

What are the key factors determining the outlook for business right now?

Businesses have been contending with the skills shortage and the effects of the ‘Great Resignation’ [JM(3] that has happened as a result of the Covid-19 pandemic. People want jobs they enjoy, but as inflation begins to bite, many people will be switching jobs to get higher pay. Surveys suggest that as many as 40% of people will be looking to change job in 2022, and while it may be tempting to think that the economy is creating new jobs, much of the activity we’re seeing in the labour market is churn.

This war for talent is also being accompanied by rising tax rates for businesses that have profits over £250,000. Many will feel squeezed and will be asking whether there will be any relief.

What do businesses need to know about fiscal policy, supply side developments or other pressures such as inflation?

In terms of fiscal policy, many people may wonder whether there is more to be done to encourage businesses to invest. During the pandemic, plenty of companies amassed money to spend on capital expenditure, Meanwhile, the super-deduction tax, as well as the easing of the Annual Investment Allowance (AIA) in previous Budgets, have been a huge incentive for companies to invest. Rishi Sunak has positioned himself as a chancellor who supports business investment. The much-vaunted super-deduction is due to expire in April 2023, and although no definitive action was taken in the recent Spring Statement, Sunak is clearly sympathetic to the need for further incentives to jump-start the UK’s lacklustre level of business investment. He therefore indicated that there would be further announcements in the autumn.

The austerity of previous governments does not seem likely to happen again, as Treasury income and the ability to repay government debt is seen to depend on a prosperous economy. However, uncertainty over events in Ukraine may also have pushed back industry’s plans to invest.

People want jobs they enjoy, but as inflation begins to bite, many people will be switching jobs to get higher pay. Surveys suggest that as many as 40% of people will be looking to change job in 2022.

Richard Ramsey
Chief Economist, Ulster Bank

We’ve seen the Bank of England (BoE) raise interest rates to 0.75% in March, and there may be further rises in the rest of 2022. While future rises might not come as quickly as the previous three, the BoE will continue to focus on containing inflation and will likely make further increases to the base rate later in the year. It’s important to remember that the reasons for high inflation are beyond much of our control, whether it’s the price of oil or supply chain problems. So any rise in interest rates needs to be done with the awareness that we don’t have an overheating economy. Current rates, however, are still low and should not affect investment decisions

What opportunities or challenges are there that could impact growth?

Despite the uncertainties, there are some sectors that have performed well in Northern Ireland and look likely to continue to do so. These include pharmaceuticals, information and communications technology (ICT), and automation. Belfast has been a leader in cyber security, and this part of the economy continued to blossom during the pandemic. Online security and shopping have become core areas of focus in the pandemic, and we’ve seen significant growth in US inward investment, including acquisitions. The defence sector may also benefit from recent world tensions.

According to data from the latest Northern Ireland Purchasing Managers’ Index (PMI) survey, businesses are experiencing some of the fastest growth in input costs in the UK, such as freight, energy, and wages. The picture is further complicated by longer-term uncertainty around the impact of new trade agreements, as the protocols following Brexit still haven’t been fully implemented. With local elections looming in May, it will be interesting to see what our political parties have to campaign on regarding trade.

What else have we seen this month?

There was quite a bit of coverage of the rise in commodities, and in particular crude oil. Not only did oil reach above $100 per barrel (pb) of Brent crude, but exchange rate changes meant it was the most expensive that oil has ever been in pounds sterling: £97.67. Two thirds of household heating in NI is oil-based, so the rise wasn’t just an issue for transport but for consumers, too.

Recent data suggests house price rises also slowed to 0.1% in Q4 of last year, and this may well be the start of a longer trend. We’ve seen price rises in the past three consecutive years, and the cost-of-living crisis and inflation may have started to already have an impact on residential real estate.

Industrial action among P&O staff might also be a theme for the rest of the year, as businesses seek to invest their profits in automation. With the ‘rise of the machines’ comes improved productivity and insulation from wage inflation and the great resignation – but also industrial action in the face of businesses balancing labour costs with their investment plans.

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