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The good, the bad and the ugly of a financial climate that relies on developments in political arena

Economy watch with Angela McGowan, chief economist, Danske Bank

Published 02/06/2015

Angela McGowan, chief economist, Danske Bank
Angela McGowan, chief economist, Danske Bank

Having just emerged from one of the worst recessions for roughly 80 years, it is a little strange that Northern Ireland's economic destiny is now looking precarious because of politics.

Back in 2008 the local economy, like so many others around the world, was literally standing at the edge of the abyss as global financial institutions collapsed, credit flows froze and confidence tumbled. There is no doubt that the recession had a substantial impact on the Northern Ireland economy as confidence tumbled and investment levels shrank. But we managed to muster through and get back on our feet.

The good:

So there is definitely a good story to tell when we talk about the local economic recovery. Currently, the economy is growing by around 2% a year. Local employment levels have risen, reaching 832,000 in the first quarter this year, while the number of unemployment claimants has fallen for 28 consecutive months and consumer confidence has rebounded strongly.

Even the housing market, which saw the largest bubble in Europe, finally recovered. Prices are rising at a sustainable rate again and transaction levels were up 22% last year.

Business confidence has recovered too and investment levels have been slowly rising. Last year Invest NI supported £1.4bn of new investment in the economy and created 9,410 jobs in the process.

And 25 brand new investors arrived in Northern Ireland in the last financial year, and the fact that this economy has managed to punch beyond its weight when it comes to attracting foreign investors augers well for our economic future.

The economy has been moving in the right direction and having experienced 20 years of relative peace on our streets, the public recognise that things have improved substantially in Northern Ireland.

The bad:

But economies are a little like movies - the plot is never straightforward and there are always complicating factors. Indeed, it is hard to find an economy across the globe that does not face challenges and Northern Ireland is no different. For us, the biggest challenge in recent years has been to grow our private sector.

Years of political turmoil have worked to stifle business investment, indigenous companies struggled as trade was interrupted and entrepreneurship was suppressed or at best diverted to neighbouring regions.

Without a sufficiently high level of industry and private sector jobs, the local economy has suffered persistently low productivity levels and struggled to create wealth. As a result, this region, like many other regions across the UK, is reliant on top-ups from HM Treasury to ensure a reasonable quality of life for its citizens.

Unfortunately another new and rather complicated challenge has emerged. The new Conservative government has made it clear that they are no longer prepared to subsidise this regional economy to the same extent. Finding ways to make do with significantly less public funding is never easy, but in Northern Ireland this political task has started to look very ugly.

The ugly:

Failure to agree a way forward on issues such as Welfare Reform is costing the Northern Ireland public greatly. We are hemorrhaging £2m a week in fines - money that should be spent on our public services. The quality of life for everyone in Northern Ireland falls when public services are eroded, especially for the most vulnerable - those that are ill.

The lack of money for educational services, universities and public investment in infrastructure also means that the very foundations of our future economic growth are now being undermined. Investment will be deterred because investors hate uncertainty. Certainty around the rate of corporation tax is only one aspect. Certainty around stable government and adequate investment in skills and infrastructure are also high up on an investor's check list.

The solution?

So, where do we go from here? Unfortunately it appears there is little room for U-turns. Politicians have promised things on doorsteps that simply cannot be delivered.

The UK government is now standing over Northern Ireland like the Troika stood over the Republic of Ireland back in 2010 and calling all the shots.

But the current UK government's strategy is also unrealistic.

Bankrupting the region with fines for non-compliance is not sustainable and will not do much for Great Britain-Northern Ireland relations at a time when the Prime Minister is keen to strengthen the Union. Questions will be raised about the equality of living standards across UK regions if Northern Ireland is left without adequate public services. Questions will also be asked about the ability of the local Executive to actually manage this region.

Diplomacy and better negotiation skills are urgently required and we must accept that a bit of give and take is needed on both sides.

  • In next week's Economy Watch, we hear from PwC chief economist Esmond Birnie

Belfast Telegraph

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