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The big questions looming for our economy in year to come

Economy Watch

By Conor Lambe, Danske Bank economist

As we move on from 2016 one thing is for sure, it is a year that will definitely live long in the memory. Despite Donald Trump's victory in the US presidential election, and even Northern Ireland's storming run at the Euros, 2016 will be best remembered locally as the year the UK voted to leave the European Union.

There is still much uncertainty around what Brexit will really look like. We don't yet know what sort of trading relationship the UK will have with the rest of Europe, what changes will be made to migration policies, or even the precise time that the UK will formally exit the EU.

While it is extremely unlikely that 2017 will bring definitive answers to these questions, there are a few things that both households and businesses should be on the lookout for during the year ahead.

The Government triggers Article 50

The Prime Minister has stated that the government will formally trigger Article 50 by the end of March, kick-starting the process that will see the UK leave the EU.

This could lead to a slowdown in business investment if organisations opt to postpone hiring and investment decisions until they get more clarity on the exit package.

While it is possible that the tone of, and progress made during, these negotiations could feed into business decision-making (either positively or negatively), business leaders are unlikely to make material investment decisions in the UK based on the commentary from either side.

They will wait until a deal is formally agreed, or could invest elsewhere.

Inflation rises and consumers feel the pinch

Since the EU referendum, the pound has depreciated by around 17% against the dollar and 10% against the euro, and these currency movements have pushed up input prices for UK-based manufacturing businesses.

The year-on-year increase in total input prices exceeded 12% in October and November and it is likely this will eventually feed through into consumer prices, with the potential for inflation to rise above the Bank of England's 2% target later in the year.

For households, this is worrying news as it will place downward pressure on real wage growth.

If their purchasing power is squeezed, consumers are likely to be more prudent with their spending in 2017.

The impact of European elections on the negotiations

If 2016 has taught us anything, it's that elections are not easy to predict. But with the French presidential election scheduled for the spring and German elections later in the year, there is the potential for new leadership in two of the EU's largest and most influential countries.

It's not clear what impact, if any, these elections could have on the Brexit process. However, they do serve to add further complexity into the business environment and, indeed, into what is already shaping up to be a complicated and challenging task for the UK's negotiators.

So, against this backdrop, where should Northern Ireland's political leaders be focusing their efforts? Obviously, our elected representatives need to ensure that the views of the Northern Irish people are made clear on all the topics included in the negotiations, but I think there are two main issues on which our own policymakers have a particularly important role to play.

The first is the land border between Northern Ireland and the Republic of Ireland. The introduction of a hard border could prove highly disruptive for individuals and businesses who have become accustomed to easy travel arrangements, particularly those that are based in border towns. The good news is that those on both sides of the Brexit negotiations are alive to this issue but, as is the case for most of the topics the exit talks will cover, we cannot be sure of the outcome. Therefore, once the negotiations get underway, it must be hoped that Northern Ireland's policymakers will engage regularly with both the UK and Irish governments to try to secure as soft a border as possible, or in the event that some controls are imposed, that steps are taken to keep disruption to a minimum.

The second is to make sure that Northern Ireland maintains and grows its strong links with other economies. This will involve attracting more foreign direct investment and supporting local businesses as they seek to expand into new export markets.

Encouraging steps have already been taken in this regard, with the First Minister visiting the US and China and the Economy Minister announcing the Trade Accelerator Plan and the International Trade Plan. While it's important that local politicians and business leaders work to strengthen existing ties, they must also start to build new links in the fast-growing emerging economies of Asia and Africa. Reaching out to new markets is high on the agenda for policymakers throughout the UK, so Northern Ireland's leaders must stand ready to grasp the opportunities that will come from Westminster's renewed focus on international trade.

As we move into the new year, there is considerable uncertainty on the horizon. Uncertainty about what will change and when after President-elect Trump enters the Oval Office, how the UK government will approach exit negotiations with the EU and the outcome of elections in Europe. However, one thing is for certain. There will be much for economists, and indeed society as a whole, to discuss and debate throughout the year ahead.

  • In next week's Economy Watch, we hear from Ulster Bank chief economist Richard Ramsey

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