The local economy is shrinking at its slowest rate in a year, providing further proof the economic downturn is past its worst point, according to Ulster Bank.

The bank’s Northern Ireland PMI report for May, released today, shows private sector business activity and new business fell at much slower rates compared with the severe reductions seen at the turn of the year. More modest declines were also signalled for backlogs of work, employment and prices charged.

“The PMIs provide further evidence that the pace of decline in the Eurozone, Republic of Ireland and Northern Ireland economies has eased further in May,” said Ulster Bank economist Richard Ramsey.

However, he added that the Northern Ireland economy continued to underperform compared to the rest of the UK, with the latest drop in activity the sharpest of all twelve UK regions monitored.

“Northern Ireland's private sector activity has now lagged behind the UK average for the last 19 months,” the economist said.

“Two factors are largely responsible for this. First, Northern Ireland has a relatively larger construction sector than any other UK region and this continues to be the worst performing sector in Northern Ireland. Second, the local economy is more exposed to the downturn in the Republic. The deep recession in the Republic has acted as a drag on the province's economic performance and will limit the pace of the recovery when it comes.”

The survey shows that the weakness in business activity continued to be most acute in the construction sector.

The slower pace of decline reflected a moderation in the rate new business fell off in May, but companies commented that demand remained muted and clients were hesitant about committing to new contracts.

Mr Ramsey added: “While Northern Ireland's contraction in private sector activity has now continued into its eighteenth month, the latest survey reported a further improvement in all indicators. This was most noticeable in the business output index which recorded its sharpest rise, albeit from extremely low levels, since the survey began.

“To put this into perspective, it is noted that in January just over half of all firms reported declining levels of output. Subsequently, this figure has fallen back to more than one third in April and more recently one quarter in May.”