I hope private sector proves me wrong about the economy
This month, I find myself in a strange position, hoping that our Ulster University Economic Policy Centre (UUEPC) models are proved incorrect and that our fears for the economy prove unfounded. Yet, having spent recent months working hard on updating our forecasts, that is the unusual position I find myself in.
The UUEPC model (based on a UK macro model developed in the Judge Business School in Cambridge) stretches to some 80 equations and 150 identities, all of which inter-depend. Readers may be asking themselves, 'Why work so hard on developing complex models when models did not do a great job of predicting the last crisis, or indeed the slow recovery thereafter?' But it is precisely because of this deficiency that it is important to invest in new models, to try and research carefully and understand what happens to economies when forces collide.
The fundamental weakness in most forecasting models is the imposition of a trend growth assumption - the idea that no matter what happens, the market will cure all ills, prices will adjust and normal service will resume. Clearly, this did not happen after the 2008 crash, and while no one knows how accurate their forecasts will be, one thing we can be certain of is that growth will not follow a stable trend rate. Not in two years' time, not ever.
So why the concern? As mentioned in last month's column, the market consensus is that the economic future is relatively bright for Northern Ireland, with a confident, job-creating private sector and an increasingly 'willing to spend' consumer holding the economy up during the public sector cuts ahead. Yet, after crunching all the numbers, the recently published UUEPC forecasts sit well below this consensus, projecting growth closer to 1% in 2016/17 than the 2-3% from other models.
So why the divergence? There are several reasons.
Impact of the cuts: In a region in which the public sector is the largest employer (and, crucially, the highest-skilled and one of the best-paying sectors, too) the scale of 'offset' required by a proportionately smaller private sector is much larger. The models suggest, even at the UK level, the economy will struggle to absorb the scale of cuts.
Scale of the cuts: One interesting feature of the forecasts from the Office for Budget Responsibility (OBR) is that though the cuts are steep in a cash sense, they are expected to be very modest in real terms. This suggests high productivity gains and pay constraint achieved in the public sector, something the UUEPC models do not predict.
Pay-rises: Although the OBR projects a slowdown in job-creation, it expects above-inflation pay-rises in the private sector as the cuts gather pace, presumably triggered by labour shortages as the UK employment rate is very high. These results does not come out of the UUEPC modelling.
Productivity growth: Slow productivity growth has been a feature of the UK economy for a number of years, yet this has in part resulted in greater employment than might otherwise have been the case. If firms begin to raise productivity levels, employment growth may slow. We will know when the Government announces its Budget in July. We then wait to see if Northern Ireland can play the hand it is dealt and decide if it needs additional local revenue raising to mitigate the effects.
Here come the jobs? One of the key building blocks of our economic models is the quarterly employment survey (QES) published by the Department of Enterprise, Trade and Investment. It is the most reliable measure of sectoral employment in the local labour market. It does not include the self-employed and so is not a complete picture, but still it is the most effective bellwether of the labour market.
Recent performance has been decent, but not spectacular. 29,000 net jobs created since the first quarter of 2012 sounds a lot, but if we had enjoyed growth at the UK rate, the figure would be 43,000. Employee levels are still 2.1% below their quarter four 2007 level, compared to the UK figure of 2.7% above.
The job data is surprising given the spectacular results of Invest NI in 2014/15. According to the seasonally-adjusted QES, the year to March 2015 saw 7,000 net additional jobs with a worrying fall of 560 in ICT, 540 in finance and insurance and 310 in administrative services, all key foreign direct investment sectors. Professional services and manufacturing did well, expanding by close to 4,000 jobs.
This data gives us reason for optimism and will increase confidence that the private sector can cope with what is coming and that the cuts will not slow the region as markedly as our models predict. Over to you, private sector.
Can the private sector growth be sustained? It will need to be for Northern Ireland to avoid a painful slowdown. The cuts are a certainty, and for those who believe the public sector has been crowding out the private sector, this could help the private sector accelerate. Of course, all this discussion of the impact of the cuts says nothing about the impact on public services, a different, but arguably more important, aspect of what lies ahead.
Neil Gibson is from the Ulster University economic policy centre
Economy watch: View from Dublin
Know who David Cameron reminds me of? Bertie Ahern, that’s who. It may seem an odd pairing, the Eton-educated toff and the lad from Drumcondra, but both are prone to the Scarlett O’Hara syndrome.
The flawed heroine of ‘Gone with the Wind’ would defer problems by saying she would think about them tomorrow — “tomorrow is another day”.
The tendency served Mr Ahern well in the frustrating Northern Ireland negotiations when tomorrow often had to be another day. It served him — and the rest of us — ill when it came to the economy, where planning for tomorrow is the whole point of policy.
Without a troika to whip him on, Mr Cameron also put off a lot of the difficult decisions until this parliament. Most analysts (apart from those who think nothing needs done) would agree this was better than full-blown austerity.
But tomorrow has arrived, and there is still much correction to be done, just when voters will be expecting better. Chancellor George Osborne told startled City of London bigwigs at the Lord Mayor’s Banquet that he will convene a meeting of the Committee of the Commissioners for the Reduction of the National Debt. The last such meeting was called by William Gladstone in 1860.
Mr Osborne’s idea is to make it illegal to have budget deficits when the economy is growing at a normal pace. It is certainly as well that the Conservatives have an overall majority.
However, it is for referendums that Mr Cameron qualifies for the Vivien Leigh Procrastination award. The Scottish gamble was a success — the Union survived and Scottish Labour didn’t, but the final consequences are still unknown.
Tomorrow is here for the EU membership referendum, with passage of the Bill two weeks ago to enable it to be held. There has been enough talking and thinking about ‘Brexit’, but somehow the arrival of legislation made the whole thing more real, as did the open rows between senior Tories.
That referendum deferred the problem of Tory eurosceptics and Ukip but Mr Cameron has already stumbled and he is not yet on the hard road.
(By Brendan Keenan)