Building a dynamic and resilient economy

Arthur Cox hosted a round table discussion on the challenges and opportunities facing the Northern Ireland economy.

How do you think the Northern Ireland economy is faring at present?

Trevor Lockhart

The Northern Ireland economy, given all the uncertainty we have encountered over the past two years, is proving remarkably resilient. Many companies report increased sales and employment numbers but bringing it all together the local economy is growing at just under 1 per cent for 2018. Whilst in the short-term the performance is reasonable, in order to achieve the long-term ambition of rebalancing the economy between the private and public sectors we need an economy that is growing much faster.

Conor Lambe

The economy had a sluggish start to this year but it’s likely that growth picked up a little in the second quarter. However, we are still in a low economic growth environment. There are two factors driving this. Firstly, there’s the squeeze on consumers across the UK. Inflation has fallen since the start of the year, but it remains above the Bank of England’s two per cent target and this is putting pressure on households’ purchasing power. Secondly, the uncertainty around Brexit and the political situation in Northern Ireland has led to business investment being relatively subdued. For 2018 and 2019, it’s likely that economic growth in Northern Ireland will remain underwhelming.

Mike Dawson

The various economic indicators suggest very low rates of growth compared to Great Britain. From our perspective we are incredibly busy, but this masks some of the future trends that are likely to come our way. We have started a process of change over the past two years and that is now delivering good results. Most businesses we deal with are starting to cut back a little due to the nervousness around what the future holds.

Jim Dobson

The perception is that it looks good at present. For us on the agriculture side, our farmers are on the crest of a wave. Since Brexit, prices have risen. Lamb prices this year have been exceptional as has been the price of beef. Farming is looking good on the ground despite the figures from the economists. The UK is pushing a cheap food policy and there is full employment. Although the perception is good, underneath the bonnet there are a number of issues.

“In terms of opportunities, the professional and financial services sector has been one of the fastest growing sectors of the Northern Ireland economy.”
— Paul McBride

Paul McBride

It is surprising how resilient the Northern Ireland economy is. We see this manifested in a healthy pipeline of transactional activity, including corporate M&A, real estate investment and fund investment. This is normally perceived as a barometer of economic well-being, but at the moment I’m not sure that is the case. With the uncertainties of Brexit only months away there is now a fragility in that resilience. That said, the international community is perhaps seeing opportunities that are harder to see from a local perspective. International investors are seeing Northern Ireland as a place to do business.   

Richard Smith

We are very busy, as are our sister companies and there is still a flow of investment coming in but there are a few warning signs on the horizon. Energy costs have gone up, and up, since the start of the year and that will be a head wind next year for large energy users. Wage pressures are going to get stronger and the pressure from the supermarkets is only going to grow. Things are good, but we are living off past investments. Looking ahead we need to get much more competitive.

What impact will Brexit have on the economy? What sectors will be hit hardest? Do you see any opportunities?

Mike Dawson

Based on the information we have at present, we see Brexit as an opportunity for us. There will be a number of imported products that we would be best placed to replace in the GB marketplace. Decisions were made five years ago, or longer, to move into certain categories and to focus on GB rather than look further afield. Therefore, almost by fortune, we find ourselves in a strong position. We have had a lot of discussions with GB retailers and it looks like a real opportunity for us. However, there will be issues around how we fulfil this opportunity with regards to employment and infrastructure.

Trevor Lockhart

The impact of Brexit will depend on the nature of the outcome, which is still unknown. The next few months could be very difficult for businesses because the political rhetoric will get ramped up on both sides as we move towards some sort of outcome. The uncertainty is going to continue for a number of months yet and that is putting businesses in a difficult situation. Supply chains are becoming more anxious about the possible scenarios and that anxiety will only increase as we go into the fourth quarter of 2018. The biggest regret of the Brexit process is that it has been driven by politics rather than by economics. The economic evidence base has now largely taken a back seat. Brexit is already impacting on the availability and access to people. We have seen churn rates of our EU national cohort increase significantly.      

Conor Lambe

Focusing on the short-term, it’s clear that Brexit is already having an impact. The consumer squeeze and the uncertainty we are seeing are both a result of Brexit. And that uncertainty is likely to persist, even after Brexit formally occurs next year. Assuming we get a Withdrawal Agreement, we will then move on to the challenge of agreeing a long-term trading relationship with the EU. These types of trading arrangements usually take several years to agree so uncertainty could be with us for some time yet. That would be challenging for businesses, particularly in terms of making strategic investment decisions.

In the longer-term, the impact of Brexit will depend on what our new relationship with the EU looks like and there are a number of issues relating to different sectors that are worth considering. For manufacturing businesses, their supply chains are key and any delays or frictions when it comes to moving goods across borders is a big concern. Alignment with EU regulations is also an important issue and one that has not been discussed enough in the Brexit debate. Changes to migration policy could have an impact on the construction sector and on tourism-related businesses. And for financial services, the loss of passporting rights represents a particular concern.

In terms of opportunities, in the very long-term there may be some benefits from reaching free trade agreements with other countries around the world, but these would be modest compared with the costs we could end up bearing if it becomes harder to trade with countries in Europe.

Personally, I believe that Brexit will bring more challenges than opportunities for businesses across Northern Ireland and the rest of the UK.

“The delay on the second North South Interconnector, combined with the decommissioning of Kilroot, is a scary scenario for large energy users.”
— Richard Smith

Richard Smith

We create a low value product and we are therefore not going to be supplying product to Japan and Australia, but we have plants throughout Europe and we do a lot of intra-company trading. It is an important part of our proposal to our customers who are supermarkets or packers who supply the supermarkets. This flexibility and security of supply is an important part of our offering and if we lose that either through tariffs or increased transport costs it would put us at a disadvantage.

There is a perception that the labour from the rest of Europe, particularly Eastern Europe, is unskilled. This is simply not the case. Some of our key people, such as electrical engineers, are from Eastern Europe. They are highly skilled and key members of our team.

As regards opportunities, Invest NI is very constrained in how it can help companies owned by multinationals and is terrified of breaking state-aid rules. That should be loosened to encourage businesses to grow here.

The uncertainty around Brexit is a big issue. Our owners have 74 sites around the world and are big investors but don’t like uncertainty. Whilst we haven’t seen any investment restrictions yet if things became more uncertain or if a deal meant tariffs and higher costs that would have an impact. We could be all doom and gloom, but we have plants in South Africa, Brazil and Russia where there are also huge concerns about the future.

“We need an Executive back. We are sitting right in the middle of Europe and the UK and we should take the economic advantages of that.”
— Jim Dobson

Jim Dobson

Brexit has meant that no one has been able to plan anything over the past two years as we don’t know what is going to happen. My big concern is that farmers are getting good prices at present and are not addressing the underlying problems, such as the future of the Single Farm Payment. At present, we have no political influence to make sure this is sustained after 2022. It has all been about animal welfare and environmental issues. We need to lobby for production and to make sure our farmers are still farming in the future and do not become gardeners. As regards workers, our businesses are low pay and the last living wage rise was horrendous. Even if we have the money I’m not sure the people are here. Over the last 20 years, more and more young people are going to university and no one wants to work in a slaughter house or a deboning room. It’s not as attractive as it was 50 years ago. We need to make sure the farmers keep farming and we have enough people to do the work. We have the land and the reputation as a green island and we need to maintain that. The opportunities are there. We are part of the UK and for home consumption we should be in a really good position here in Northern Ireland to feed 65 million people.

Paul McBride

Two things are vexing our clients with regard to energy; security of supply and enhancing competitiveness through lower energy costs. Central to that has been a 20-year programme around the single energy market and we will have to see how that will work post-Brexit in terms of regulatory alignment and the policy underpinning it. There are also major infrastructure challenges, including the North South Interconnector which is going to be an issue post EU departure.

In terms of opportunities, the professional and financial services sector has been one of the fastest growing sectors of the Northern Ireland economy. In some ways it has had a feel of a near-shoring, low cost initiative but Brexit’s impact on the City of London could create opportunities for our pool of graduates within that sector.

What can be done to grow the economy in these uncertain times and what are the drivers for growth?  Skills and education; infrastructure investment; innovation/R&D; and growing exports.

Richard Smith

People is a big issue and apprenticeships are important. It is becoming increasingly difficult to find good people, particularly electrical and chemical engineers. One frustration is that we are paying the apprenticeship levy, which is 0.5 per cent of our payroll, but the legislation hasn’t been enabled in Northern Ireland to release that money to support apprenticeship programmes in companies. In effect it is an extra business tax. From both – the perspective of the business and the individual – apprenticeships are fantastic. They give people a good training in a real business environment.

Mike Dawson

I would agree. We have gone ahead ourselves and launched an apprenticeship scheme to attract A level students as an alternative to university and to give them a career path. But the lack of guidance from government on apprenticeships has been poor, with little or no feedback and we have had to replicate the schemes in Great Britain.

“I believe that Brexit will bring more challenges than opportunities for businesses across Northern Ireland and the rest of the UK.”
— Conor Lambe

Conor Lambe

Over the last 12 months, we have engaged with business customers of all sizes and across all sectors. The issues of skills shortages and difficulties around recruitment have been raised by nearly everyone. Many businesses are finding it very difficult to find people with the skills they need. We have seen some customers taking the approach of ‘making it themselves’. They recruit younger people and work with local universities and colleges to design training programmes for them and are also looking at ways to turn ‘jobs’ into a ‘career’ so as to make them more attractive to young people. Going forward, I think close collaboration between businesses and education providers will be very important, particularly as technological changes are likely to bring about the need for lifelong learning, with people needing to develop new skills and change roles throughout their careers.

Trevor Lockhart

The root of this problem is in the education system and it’s something the business community need to be more vocal about. In Northern Ireland there is a perception that we have a high-quality education system; that’s simply wrong. If you benchmark the attainment levels of our school leavers against other international comparators our system is failing, and we need to address that. For example, 40 per cent of school leavers in Northern Ireland leave with A level grades A to C. In the Republic of Ireland 90 per cent of pupils leave with their leaving cert [equivalent to A levels]. The evidence shows that attainment at 16 is a significant contributor to productivity. Looking across the UK we are fourth highest in terms of spending per pupil – resource is not the problem. It is the way we are utilising that resource. We have an overcapacity, with 71,000 surplus school places. Looking at our literacy and numeracy levels, we have a mountain to climb. There are also significant differences between boys and girls, grammar and non-grammar and Protestants and Catholics. This needs to be addressed, as education is the corner stone of the economy.

Conor Lambe

We have a long-standing challenge in Northern Ireland of low productivity. Over the last 20 years, productivity levels – or the level of output produced in one hour’s work – in the local economy have averaged close to 20 per cent below those across the UK as a whole. And in the last decade, the UK’s productivity performance has been pretty poor. There are four ways to improve productivity and they are the four things outlined in this question; skills and education; infrastructure investment; innovation; and growing exports.

Regarding exports, there are two aspects worth considering. Firstly, increasing exports directly increases economic output. Secondly, there is also an indirect benefit from exporting which comes through increased productivity. By selling in international markets, businesses are forced to raise their game through exposure to non-domestic competition.

Without returning to Brexit, one benefit we have in Northern Ireland is the seamless border with the Republic of Ireland. For any business wanting to start exporting, selling to the Republic of Ireland is a good first step. The commercial environment is not too dissimilar to here and you can be on a customer’s site very quickly if you need to be. It’s very important that we avoid a hard border and agree a good trade deal with the EU as we don’t want to see new restrictions relating to this export channel.

Richard Smith

There are a number of important energy-related issues. The delay on the second North South Interconnector, combined with the decommissioning of Kilroot, is a scary scenario for large energy users. That has got to be addressed. There also needs to be more accountability about pass-through charges. Last September a 6 per cent increase was announced with no consultation or any discussion. What is going to happen this year? You can hedge prices to some extent, but these pass-through costs have a major impact for large energy users.

“In Northern Ireland there is a perception that we have a high-quality education system; that’s simply wrong.”
— Trevor Lockhart

Trevor Lockhart

We don’t have a vision for energy policy in Northern Ireland, which is important to sustain our economic ambitions. As a consequence, many large energy users are taking control of their own energy needs themselves by investing in renewable technologies. They are doing this to get control and certainty over their energy costs. If the large energy users then come off the grid, that will have an impact on those left on it. We need a roadmap for energy policy, defining what the destination is and how we get there.

What should be the one economic policy priority for any re-established Executive to focus on?

Richard Smith

Infrastructure in general and for our business, waste infrastructure. We are the biggest user of recycled paper on the island of Ireland. There is an enormous inefficiency in how recycled paper is collected, with each council doing its own thing, leading to a huge amount of duplication and cost. We need a streamlining of decision-making in this area and to link it into the need for circular economy.

Paul McBride

On the infrastructure theme, the lack of current government came into sharp focus with the court decision on arc21. Not only do we not have any government direction but the senior civil servants, who we thought would keep the place running, are constrained. That makes it completely untenable not just for business but for everyone living here. That logjam needs to be fixed quickly and in a much better way than we had before – where projects were favoured by one political party or another. We need a much better longer-term infrastructure investment strategy that business can plan around.

Jim Dobson

We need an Executive back. We are sitting right in the middle of Europe and the UK and we should take the economic advantages of that. Why can we not have the best of both worlds? Get the Executive back and working together to become an economic advantaged area. That needs joined up thinking and to take away the local politics of orange and green.   

“From our perspective we are incredibly busy, but this masks some of the future trends that are likely to come our way.”
— Mike Dawson

Mike Dawson

Infrastructure is probably the most obvious one, but for the longer-term transitioning of the economy from over reliance on the public sector to something more dynamic we need to focus on our young people. When people talk about the great education system in Northern Ireland, they are focusing on the very top and are not looking at the greater number of those young people the system fails. We need a greater focus on skills and education.

Conor Lambe

Addressing the challenges in the labour market. We currently have a low unemployment rate in Northern Ireland, which is encouraging, but we face two long-standing challenges in our labour market. One is the low level of labour productivity and the other is a high rate of economic inactivity. The inactivity rate in Northern Ireland, that is the proportion of people who don’t have a job and aren’t looking for one, is around 28 per cent, compared to about 21 per cent in the UK. We are also the UK region with the highest rate of economic inactivity. Currently, 17 per cent of the working age inactive cohort would like to be in a job, which would be beneficial for both the individuals themselves and for the economy. The Executive should focus on working with businesses to find ways to bring the inactivity rate down and push productivity levels up. But these will not be easy tasks and it will take time to deliver real results.

Trevor Lockhart

Leadership. Northern Ireland badly needs leadership and everyone’s preference is we achieve that through a devolved administration with an Executive. There is no expectation that is going to happen quickly. The business community cannot stand back and wait for six, 12 or 18 months for our politicians to get themselves back to work. In the absence of that we need the Secretary of State to show some leadership. She has been presented by the business community with legitimate options as to how she can create the circumstances that would allow our civil servants to take decisions that can move things forward. 

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