Belfast Telegraph

Our economic growth is okay, but we're still being outdone by the Republic

Analysis

By John Simpson

In the Ulster University Economic Policy Centre Outlook last week, the verdict for the local economy is "better than expected, less than needed".

Converting that headline into a simple measure of what is happening, or expected to happen, to the economy in 2017 and 2018, the key yardstick is that the growth of the Northern Ireland economy (as measured by GVA: gross value added) in 2016 was 1.5% and for the next two years may be 1.1% and 1.2%.

The unwelcome assessment is that during 2017, the current year, the economy is growing more slowly than last year, and in 2018 the trends point to a continuing period of slow growth.

Anything less than 2% per annum is less than satisfactory.

For comparison, the forecast for NI from Danske Bank for the same two years is of 1.2% and 1.0% growth - not very different but implying some difference of direction in their measurements.

To describe the outcome from the statistical modelling in the Ulster University as "better than expected" is a gloss on the still incomplete impact of Brexit.

The existence of even a low rate of expansion is better than a contraction and, for those with memories of the misleading statements during the EU referendum, contradicts the inappropriate interpretation of the then economic forecasts from organisations such as the Treasury.

Brexit is having an influence but not yet as dramatic as some predicted.

The sterling exchange rate has taken a serious hit, imports are more expensive and the index of retail prices has risen. Thankfully, the depreciated value of sterling is a bonus for exporters but that must be set against the higher import costs.

All of this is happening before the full adverse impact of Brexit can be expected.

The modest growth estimates for 2017-18 are welcome but, by historic standards, they are lower than any Programme for Government would set as performance objectives. On past standards, an annual growth rate of at least 2% would have been necessary if only to maintain employment levels and a small rise in real living standards.

In the last decade the major recession and property market slump wiped out several years of potential growth.

In recent years, the NI economy has evidenced two unwelcome comparators. First, NI is regularly showing a lower rate of growth than the UK economy. In 2017 and 2018, the forecasts from the Ulster University for the UK are growth of 1.6% and 1.4%.

That leaves a widening performance gap which merits a more careful analysis. It may be partly caused by fiscal pressure on the NI budget, linked to the Early Leaver Scheme working through the public sector. Additionally, the causation may lie in poorer productivity performance linked to the sectoral structure of the regional economy. Whatever the causation, generating a positive reversal of the divergence will not be easy.

A second unwelcome comparator lies in the diverging performance compared to the Irish economy. For the years 2017 and 2018, the International Monetary Fund (IMF) anticipates that the Irish economy will grow by 3.5% and 3.2%. There has been international interest in the recovery of the Irish economy.

The IMF analysis gives a conservative result but, even on the IMF basis, Ireland is one of the faster growing European economies.

The slow pace of the local economic recovery poses serious policy questions.

One obvious response would be to acknowledge that, until Brexit is settled, the combination of uncertainty and erosion of real earnings (following inflation) will be loaded against the NI economy.

Only when the Brexit deal is finalised and agreed with the EU will normal competitive strengths come back into play.

Even then, NI policymakers will need to completely refresh and re-target our economic development policies.

The economic environment of 2019 and beyond will be very different to what was happening before 2015.

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