www.pwc.co.uk/ni
The NI Economy –
Performance, Prospects and
Policies
13 October 2015
RTPI Northern Ireland Conference
Dr Esmond Birnie, Chief Economist
with PwC in NI and Scotland
1. To what extent is the NI economy
still recovering…
RTPI
PwC
October 2015
Slide 1
Economic recovery continues, but slowing…
1. Output growth but slowing
down…
2. Unemployment falling but at a
slowing rate…
GDP growth
(%)
2012 2013 2014 2015 2016
NI*
1.2** 1.2**
United
Kingdom
RoI
(%)
Northern Ireland
United Kingdom
8
1.2
2.2
2.2
1.8
1.7
7
2.9
2.5
2.4
5
6
4
3
-0.3
0.2
5.2
5.7
4.6
2
Note: *NI output growth measured by GVA.
**: DETI (2014) estimates but ONS data suggest a lower
growth rate.
3. Consumer and business
confidence volatile mixed
Sometimes negative, lagging behind UK average
RTPI
PwC
October 2015
Slide 2
With NI bottom of the UK regional league table…
Economic indicator
NI
Wales
Output per head 2013
10th
12th
3rd
2nd
Economic growth 2014
12th
10th
9th
2nd
Employment rate Dec. 2014Feb. 2015
12th
5th
4th
2nd joint
Employment growth Mar.2007Mar. 2014
10th
6th
11th
2nd
Earnings levels 2014
12th
10th
4th
2nd
RTPI
PwC
Scotland SE England
October 2015
Slide 3
And, we continue to be constrained by the same,
persistent, economic issues…
Key economic challenges
Skills
- Leadership and
management
- Intermediate and
essential
Exports
Innovation
- R&D
- Patents and
outcomes
- Clusters
RTPI
PwC
- Competitiveness
- Manufacturing
- Tradeable
services
- RoI/Eurozone
- BRICs/emerging
October 2015
Slide 4
In fact, a two-speed economy in terms of sectors…
Employees selected sectors, March 2015 vs March 2013
Sector
March 13
March 15
Change
Public sector
215,700
210,000
-2.6%
Health & residential care
121,450
121,470
0.0%
Construction
29,450
30,750
4.4%
Tourism and Leisure
52,450
55,870
6.5%
Food processing
16,560
18,710
13.0%
Financial services
18,540
18,020
-2.8%
Business services
33,940
31,450
-7.3%
Retail
111,110
115,400
3.9%
Manufacturing (excluding food+pharma)
53,630
58,230
8.6%
694,660
719,030
Total
RTPI
PwC
3.5%
October 2015
Slide 4
The limits on the NI recovery…
•
Output: still well below 2007 peak- one measure shows Q1 2015 c. 8%
down on peak whereas the UK economy passed previous peak in Q3 2013
and by Q2 2015 6% above that peak.
•
Construction: volume output about 40% lower than in 2007, whereas UK
sector is back t0 where it was in 2008.
•
Property: recovery in transactions and prices limited relative to GB.
Housing market still fragile.
Employment growth: In 2014-15 Invest NI a very successful year in
terms of hitting targets- especially FDI. Some slowdown inevitable. In any
case, the jobs growth was not accompanied by productivity or living
standards.
RTPI
October 2015
•
PwC
Slide 6
2. There are threats even to this
incomplete recovery…
RTPI
PwC
October 2015
Slide 7
Threat of international disruption…
• NI’s exposure to Russian food
sanctions.
• Eurozone uncertainty- Euro
could devalue further.
• Slowdown in Chinese economy
has occurred, possibility of
credit crunch and precipitous
decline. In any case, treat
Chinese growth statistics with
care.
RTPI
PwC
October 2015
Slide 5
Certainly, deceleration in some emerging
economies and slow growth in the Eurozone…
1.1
Canada
UK
2.5
Germany
1.5
Russia
-5.0
Greece
Ireland
-1.1
5.7
France
1.1
US
Italy
Spain
2.6
0.7
3.1
Mexico
Japan
China
Key
X.X = GDP growth in 2015
6.9
India
2.3
0.9
7.5
Brazil
South Africa
-0.9
1.8
Australia
2.6
Source: PwC main scenario for 2015
RTPI
PwC
October 2015
Slide 9
Threat of increased inequality (globalisation and
technological)…
•
So-called“1% economy”, in USA
1977-2007 top 1% of earners saw
income growth of 60%.
•
Increasing premium on high skills.
•
NI faces greater challenge because
we have higher % no skills.
•
Increased numbers being ‘left
behind’ may threaten recent strong
job creation performance
RTPI
PwC
October 2015
Slide 10
Threat of political deadlock or even collapse…
Even before recent political disputes, Executive’s position
fundamentally unsound because did not have an agreed balanced
budget for 2015-16.
That Budget problem partly about welfare reform but deeper problems
too.
Stormont crisis has already had some (negative) impact on FDI and
Corporation Tax reduction strategy in great doubt.
Devolution is theoretically attractive but in practice how much positive
difference has it made since 2007?
RTPI
PwC
October 2015
Slide 11
Threat of fragility in housing market in NI…
•
14
7.3
7.9
6.9
7.6
6.7
7.2
6.4
7.0
8
6.1
6.3
10
5.7
6.4
12
6.7
7.5
Relatively low price/earning ratio
(affordability) plus low rate of new
new builds relative to “need”
suggests medium to longer term
growth prospects.
6.5
6.9
•
9.1
10.3
16
8.5
9.8
House price affordability, 2014 and
2020
9.8
11.5
Some recovery in prices/activity
since low of 2008-12.
13.5
14.5
•
6
4
2
0
But, still fragile:
- Reversals in Q1 2015.
- High levels of negative equity.
- Linked to overall macroeconoimc
prospects/public sector austerity.
RTPI
PwC
October 2015
Slide 12
3. An unsure policy response…
RTPI
PwC
October 2015
Slide 13
Even before this year’s crises was devolution
working?
•
Have the series of high profile events created a real global brand NI?
•
Exports to BRICs/emerging markets, growing, but overall exports in Q2
2015 still barely above 2011.
•
Mixed messages in tourism particularly from external visitors.
•
Some policies in lockstep with Whitehall, so no local flexibility.
•
Keeping taxes and charges low alongside a £10bn subvention may not be
sustainable.
•
Other policies- BMAP, education and welfare deadlocked.
•
Ironic if “solution” to welfare reform was to “undevolve” social security.
Would also place planned devolution of Corporation Tax powers in doubt.
RTPI
PwC
October 2015
Slide 14
Stormont’s money problems…
Very hard to resolve because contain the following elements:
•
Growing “penalties” for non-implementation of welfare reform.
•
Previous 2011-15 Budget was not in really "balanced”- inadequate allowance
for spending pressures.
•
Ring-fencing most of DHSSPS and all of Education created extra pressures
elsewhere.
•
Since the 1970s a situation has developed whereby spending per head
substantially exceeds the UK average, whereas taxes paid are lower.
•
There has been no attempt to conduct a zero based review of public
spending.
RTPI
PwC
October 2015
Slide 15
Austerity will continue to bite…
•
London departmental spending cuts & GB welfare cuts through to 2019 has
consequences for NI.
•
Penalty for non-implementation of welfare reform, £87m in 2014 and
£114m in 2015 (and rising).
•
Current funding difficulties in health were very predictable- a number of
reports in 2011 suggested:
•
Rate of cost increase in health exceeds the NI average.
•
NI per capita health needs greater than the UK average.
• By implication, in the absence of fundamental reform, demand for
healthcare will always outstrip resources.
• In the absence of political agreement, medium-term picture is quite bleak.
• The money “runs out” this month! i.e. cover for the “fantasy Budget” is
exhausted.
RTPI
PwC
October 2015
Slide 16
Decentralisation elsewhere in the UK but NI…
•
The September 2014 Scottish Referendum vote did not imply business as
usual.
•
Scottish Government already has the 2012 Scotland Act and likely to have
further powers, such as Income Tax, VAT assignment and Air Passenger
Duty.
•
Also, Cardiff’s Assembly, City Deals to big English urban centres and
London.
•
Not just an "English question” but a "London question”- hitherto, London
has generated the net fiscal transfers going into the other UK regions
(including NI)- how long and how far can that continue?
•
Notwithstanding permissive legislation, reduction of Corporation Tax in NI
in 2017 now very doubtful.
•
A worrying likelihood that NI is going to lag behind.
RTPI
PwC
October 2015
Slide 17
And what happens if devolution collapses?
• Stormont now appears to be about to
hit two rigid barriers- the legislative one
relating to temporary standing down of
FM and the Budgetary one.
• IF Direct Rule again (and it is unclear
for how long) a number of things could be
dealt with, e.g. Budget, welfare reform,
capital spend and “hard” tax choices.
• So, in short term, not necessarily
disruptive of business.
• However, loss of ability to frame
devolved policies and probably
Corporation Tax 2017+
RTPI
PwC
October 2015
Slide 18
NI impact of the Chancellor’s policies (1.) Tax
credits…
In the July 2015 Summer Budget
the Chancellor announced a
substantial reduction in the
provision of tax credits for families
on low pay.
This will have proportionally
greater impact in NI- ICTU
indicates that per capita receipt of
tax credits is one-quarter higher.
DSD reckons (September 2015)
120,000 families would “lose” an
average of £918 p.a.
RTPI
PwC
October 2015
Slide 19
NI impact of the Chancellor’s policies: (2.)
National Living Wage from April 2017…
• He intends rebalancing support for low
paid from the Exchequer to businesses.
• As Heenan Commission (Sept. 15) noted,
we lack detailed analysis of what might
happen in NI.
• OBR indicated a UK job loss of 60,000120,000 by 2020.
• Pro rata, that would be 1,500-3,000 here
in NI but could be more.
• Likely to directly impact 13% of UK
employees but 19% here.
• Strong effects on: Hotels, pubs and cafes,
retail, care homes.
RTPI
PwC
October 2015
Slide 20
NI impact of the Chancellor’s policies: (3.)
Emphasis on productivity…
RTPI
PwC
October 2015
Slide 21
4. What it could imply for you…
RTPI
PwC
October 2015
Slide 22
Impact of planning
To the extent the process is slow, it
is a brake on investment and hence
growth.
• PfG target that 90% of “major”
investment projects would have a
decision within six months by
2014-15. Not realised
(planningresource.co.uk June
2015).
• Transitional issues around RPA.
• Unlike England, planning not a
major constraint on housing
market.
RTPI
PwC
October 2015
Slide 23
Things to watch out for…
Interest rates
•
Subject to China/Eurozone/US Fed. Reserve decisions etc., Bank of England
rates likely to start rising in early 2016, up from 0.5% now to a new normal
of about 2.25% by 2018.
Exchange rates
•
A further depreciation in Euro relative to sterling very possible.
Energy prices
•
Will rise in medium to long term though global oil may remain below $100
p.b. for some time.
Wages and labour supply
•
RTPI
PwC
Wage growth picking up after long period of restraint (and now impact of
National Living Wage).
October 2015
Slide 24
What you should do…
Markets
• Need to weigh up risks of moving into move distant markets against
likelihood NI, RoI and Eurozone markets could all be relatively slow
growing (also, possibility of “Brexit”).
Government
• Don’t rely on it.
Interest rates
• Anticipate the rise.
Exchange rates
• Prepare for Euro to decline further.
RTPI
PwC
October 2015
Slide 25
Thank you, look forward to discussion
later…
Dr Esmond Birnie
Chief Economist
028 90415808
07850 907892
[email protected]
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