Neil Gibson: regional economic forecast

A challenging economic road lies ahead as the UK pays down its debts, Neil Gibson predicts. Export growth and cutting corporation tax, he contends, can boost Northern Ireland’s economic recovery.

It is a difficult time for economic forecasters. The economic climate, both globally and domestically, remains uncertain and the risks are so significant that forecasts for individual years carry a greater health warning than ever before. So why forecast at all? The process of developing forecasts and of considering all potential outcomes brings a discipline to one’s thinking and helps prepare for what might lie ahead, and thus remains a usual tool in strategic planning for governments and businesses alike. Of course one might expect such a defence from a professional forecaster!

Certain problems

However uncertain the outlook may be one thing is for sure: the road ahead will be challenging. At a UK level, despite the already announced cuts, the economy remains too expensive to run. The national debt is still rising, just by a lesser amount than previously, and only the structure of the UK’s borrowings and the faith in UK policy shown by rating agencies has not pushed the cost of servicing the debt higher. Currently UK debt stands at £1,105 billion, equivalent to £16,900 per man, women and child in the country.

Solving the debt problems remains a key challenge for UK policy- makers and though many economists argue for a moratorium on government cuts and a continued wave of spending, it remains doubtful if the bond markets would allow this. In any case, the data suggest it is unlikely that the Government receipts will increase sufficiently to meet spending levels. In other words, the Government must find way to run the country for less.

Northern Ireland: in denial?

Continuing the theme of debt, Northern Ireland has an extremely fortuitous position in that it does not have to fund its public services directly, rather the UK Exchequer provides ‘top-up’ money to the tune of approximately £10 billion per year. Delightfully for Northern Ireland, there is no need to pay this back, or indeed justify its continuation. But times are beginning to change. The UK does not necessarily have the £10 billion to give anymore and, quite rightly, the growing suggestion is that Northern Ireland should be thinking of ways to reduce this dependency.

Worryingly, the response to the recent ‘cuts’ in Northern Ireland was one of near outrage at the devastation they might cause. Alas, the already announced cuts may be just the tip of the iceberg depending on the performance of the UK economy in the near future. Northern Ireland talks a good game, we have many strategies and many plans, but are the decisions being made to help grow an economy that is more sustainable and one that reduces its reliance on its UK ‘sugar daddy’?

The latest Oxford Economics forecasts suggest not. The outlook is for very sluggish labour market growth, climbing only very slowly back to the 2008 peaks. Unemployment is set to remain well above its 2007 lows and living standards are likely to fall back slightly relative to the UK. With net job creation forecast at less than 3,000 per annum, over the next decade it is going to be a very difficult time for young people looking for work. The public sector is looking at recruitment freezes and cuts to procurement to deal with reduced budgets, a strategy that has limited readacross to a strategic aim to grow the private sector and to support youth employment. The change in fortunes for the public sector will have a significant impact on the Northern Ireland marketplace, though demand pressures should prevent significant losses in the education and health sectors.

Painful times

The recession has been extremely painful for many businesses and individuals in Northern Ireland. It is difficult to be certain about overall job losses as the figures undergo continual revision but claimant unemployment has risen 36,300 since its low point of 22,400 in November 2007 and the Quarterly Employment Survey suggests a loss of almost 32,000 employees since December 2007.1 The losses have been focused within the construction and manufacturing sectors with retail and distribution the next most significant.

In keeping with the sectoral profile, the occupational data of the claimant unemployed suggest that over 62 per cent are looking for elementary, sales or skilled trade occupations. This suggests a very specific profile amongst the unemployed and sets out a considerable challenge in terms of finding suitable employment for these people. Should economic policy remain focussed on only attracting high value added jobs, then many people currently unemployed would find it hard to get back into work. High value added jobs would create significant ‘supply chain’ jobs, which might require the skills currently held by the unemployed, but the scale of these jobs that would be needed to require the amount of available lower skilled labour would be significant.

Not all bad news

The recovery in the global economy during 2010 and 2011 has helped exporting businesses perform well across the UK and Ireland and this has provided a welcome boost locally. The agriculture sector and non-construction linked manufacturing sectors have performed relatively strongly, indeed enjoying small increases in employment levels in some cases. Worryingly, however, the export sector in Northern Ireland is not big enough and employers are treading carefully with regard to recruitment, meaning this strength has done little to offset the overall decline in the domestic economy. In aggregate terms, the latest Oxford Economics forecasts suggest that GVA growth will be positive in 2011 (1.1 per cent). However, this is largely driven by the performance of high value added export businesses and has had little impact on overall employment numbers, though at least it has prevented further significant rises in the numbers unemployed.

The summer 2011 Oxford Economics forecasts suggest that professional services will continue to be the primary source of job creation as industry continues, and public services begins to, outsource a range of business functions. A slowdown in the rate of job losses in manufacturing and agriculture is projected, but no sustained return to job growth under current policies. This is partly a reflection of the ongoing improvements in productivity and the continued global competition in these sectors. In output terms both sectors are, however, expected to expand and have a positive effect on overall economic growth in Northern Ireland. It is also a fair comment that both sectors are subject to some upside risks and will hope to perform better than the base forecasts suggest.

The potential for the City of Culture in 2013 to attract new visitors (and who knows, perhaps future investors or residents) plus the undoubted tourist potential offered by Northern Ireland’s historic performance in the world of golf, in which it can boast three separate major winners in just 18 months, suggests there is potential even in sectors currently facing tough times.

Looked at from a local perspective, the current Oxford Economics forecasts make fairly bleak reading, with 18 of the 26 councils forecast to have a smaller labour market in 2022 than they did in 2008. It will be important that the new economic strategy, the regional and transportation strategies, and the various city centre master plans that have been developed are cognisant of this backdrop. Without a boom from construction and retailing, the economic conditions are very fragile in many locations across the country. Supporting sectoral rebalancing away from the heavily professional services-led outlook currently projected, or moving jobs out of a congested Belfast (perhaps public sector jobs?), may be required if balanced regional development remains a local policy goal.

And what of policy?

The latest economic strategy is due for publication later in the year. It is likely to continue the emphasis on growing the Northern Ireland economy by attracting and developing high value added internationally competitive businesses. A more explicit focus on exports is likely, and possibly some consideration of short-term employment creation policies. It remains to be seen how radical the strategy will be and what new strategic aims are turned into policy practice through new legislation or changes in spend.

Worryingly Northern Ireland’s track record in policy change is not terrific with regard to economic policy. Decisions over tuition fees, raising local taxes, post-primary selection policy or approaches to the end of selective financial assistance have all taken a significant amount of time, or remain unmade. This suggests changes to economic policy might be rather slower than one might have hoped for a small, and supposedly nimble, economy.

And of course there is the issue of corporation tax. Now a stated aim of the local parties to achieve corporation tax-varying powers, the ‘battle’ with Treasury is ongoing. Oxford Economics estimates suggest a very favourable outcome for Northern Ireland under lower corporation tax levels. The current debate remains worryingly focussed on the ‘cost’ to the block grant.

This seems a rather short-sighted concern for a number of reasons. Firstly it is a transfer of money from the public to the private sector, not a straight ‘cost’, and secondly the cost needs to be determined. All the figures currently presented (including those presented by Oxford Economics and those by Treasury) are only estimates. Why a region with obvious economic challenges would forgo the possibility of getting such a major power because of what the cost might be seems somewhat absurd.

Surely the sensible approach is to get the powers, measure the cost and respond accordingly? Equally absurd is the notion that the solution to Northern Ireland’s economic challenge will not ‘cost’ any money and therefore this idea should be discarded. It is not clear what other ‘cabs on the rank’ there are for radical economic policy changes and this remains the greatest flaw in the anti-corporation tax debate; there is nothing else being offered to create jobs and reduce the public sector ‘tab’ in Northern Ireland.

What is without question is the severity of the economic plight facing Northern Ireland. Our de facto economic policy of ‘protecting the block grant’ many not save us much longer as the money may not always be there to give in the same quantity. Furthermore the ailing domestic economic is unlikely to recover significantly in the short run faced with lower real incomes amongst the customer base. This leaves all hope for economic growth at the door of Northern Ireland’s exporting companies. There are a number of world class firms in this category in Northern Ireland, and this gives cause for optimism, but there are simply not enough, meaning economic performance below the UK and Republic of Ireland is the most likely outcome.