Why Northern Ireland must be well prepared for Brexit
Summer is over, the schools are back and the morning commute feels that little bit longer. As we get back in the old routines it's hard to believe that one of the most momentous moments in UK history took place just before the summer. Three months on from the vote to leave the European Union and the doomsday scenario that was pitched to us has yet to materialise.
The former Chancellor had told us there would be an emergency budget, unemployment would rocket and property prices would crash. However, for us in Northern Ireland, this month's Labour Market report has revealed that unemployment continues to decrease and according to July figures from the Office for National Statistics, property prices here have actually risen by more than 4% in three months. So why have these gloomy predictions failed to materialise? Well, in large part it's because nothing has changed. Yet.
Let's take a look at what has been impacted in the past three months and the changes we can expect over the coming months.
Financial market volatility:
Look at any plot of sterling exchange rates and you can clearly see the day of the referendum result. In fact, sterling is at a 30-year low against the dollar. While this is good for exporters, it also pushes the price up of anything bought in foreign currency. This may be starting to come through in some data. The Ulster Bank PMI for example showed the largest rise in costs in over five years. Similarly to currency markets, the referendum result was clear to see in stock market performance, with a significant decline immediately following the result. However, since then, markets have recovered well and (at the time of writing) are posting 12-month highs.
Swift action from the Bank of England:
In August the Bank of England cut interest rates from 0.5% to 0.25% and introduced a range of measures to further support the UK economy. I would not be surprised if the Bank makes another move to cut rates before the end of the year. The Bank had to be seen to react quickly.
The UK's economic growth is highly dependent on consumers so their appetite for spending matters a lot. In the immediate aftermath of the referendum, consumer confidence tumbled but data for retail sales shows an increase for July as warmer weather fuelled clothing and food expenditure. Latest confidence measures show that consumers' nerves have settled for now and returned to pre vote levels, again driven by a sense of normality as nothing has actually changed yet. It is a broadly similar pattern for businesses with sentiment plummeting and coming back again.
Forecasts are revised, and re-revised:
While the market consensus is for weaker growth, no one is quite sure how growth will be impacted. Almost all forecasters revised their forecasts downwards after the vote but there are now some that have edged their predictions a little higher on the back of most recent data and the lack of movement on triggering Article 50 which would start the two-year exit process.
So, what now? Other than 'Brexit means Brexit' we are no clearer on what Brexit actually means and the economy appears to continue broadly as was. That said, this is no time for any smugness or complacency. The real impact will begin to be felt when the exit deal emerges and the UK then leaves the EU. By then, all the massively important issues will have been faced up to - what happens to the EU funds that come to NI? Personally, I never bought the doomsday scenarios that were pedalled by the remain campaign but I arrived at a remain position based on my own assessment of the economic benefits being part of the single market brings to Northern Ireland.
From a trade perspective, Northern Ireland's bigger challenge is arguably that the vast majority of our companies do not export.
We need to achieve a step change in this, and one that looks further afield than the EU. Northern Ireland entered the EU at a time when it faced serious economic challenges around economic inactivity, low productivity and poor infrastructure. Those same challenges remain today and require a significant policy focus.
We need to prepare for Brexit but we need to remain focused on all the challenges ahead.