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Employment on the rise but productivity stagnation remains a concern

By John Simpson

The Bank of England, through the Monetary Policy Committee, has forecast that in 2014 the UK economy will show levels of economic growth that are better than in any recent year. GDP is expected to increase by 3.5% before falling to slightly lower rates of growth of 3% in 2015 and 2.6% in 2016.

These forecasts are for the UK in total but, in the absence of any unusual distortion, should mean a more buoyant regional economy. Employment, which has been increasing markedly, is expected to enjoy the fastest annual rate of increase of recent years, at 2.75%, in 2014 and continue to increase in 2015 and 2016.

There is an emerging difference in changes between employment and national output. Employment has increased faster than would have been expected even though productivity has stalled. If Northern Ireland enjoys comparable changes in employment, by over 15,000 in the last year, employment will continue to increase at a similar rate in 2014 and into 2015.

Northern Ireland shares the same apparent productivity problem as is revealed in the UK. Although the reason for the productivity lag cannot be identified with precision, there are several contributory causes.

Firstly, businesses responding to the recent recession are thought to have been reluctant to downsize employment to reflect the recession because they wished to retain skilled, or difficult to replace, employees. Secondly, older employees are now more likely to try and remain in the labour force and delay the effective date of retirement — and this seems to have made a significant impact on the labour market.

For whatever reasons, both in Northern Ireland and for the UK in total, employment has increased more than expected and, hypothetically, there might be a potential increase in output of 6%-9% which could be achieved with no further increase in employment. In short, as the recovery continues, output may be expected to increase faster than employment.

Based on the Bank of England report, there are two key questions from a Northern Ireland perspective. First, has the Bank of England made a reliable forecast for the UK economy? Second, how will those forecasts impact on a region such as Northern Ireland?

The validity of the forecasts depends partly on several critical assumptions.

These include:

  • Bank rate will average 0.6% in 2014, against an average of 0.5% in 2013. That is consistent with an increase of about 0.25% later this year.
  • The effective exchange rate for sterling will remain at about current levels.
  •  Oil prices, internationally, will continue to fall by about 2% each year.
  •  Gas prices (in Great Britain) have fallen from 2013 to 2014 by 18%, but will edge up in 2015.
  • Nominal government spending in 2014 will be 2% up on 2013, but be squeezed down fractionally in 2015.

If the Bank of England assumptions hold firm, there are positive implications for increases in GDP, small improvements in real household income, and some increases in employment.

Interestingly, and slightly dangerously, the bank believes that average weekly earnings will rise by 1.25% in 2014 compared to a 1.9% inflation rate. Only in 2015 will earnings appreciably exceed inflation.

Nevertheless, the forecasts by the Bank get closer to straining credibility when they suggest that UK exports will increase by over 5% in 2015. That estimate must then be reconciled with increases in GDP in the Eurozone which are less than 2% pa and in the USA at 2%-3%.

Recent forecasts from the Eurozone are even more pessimistic than was assumed by the Bank.

The Bank of England forecasts err on the side of ‘an optimism bias’. The defence of maintaining base rate at 0.5% is now not easy to accept and is counter-intuitive. In Northern Ireland, mortgage lending rates look set to rise.

The role of the local banks is set to become more critically important and their lending actions will need to be monitored.

Company report: Ballyvesey Holdings

The Ballyvesey Holdings group is owned by Northern Ireland family shareholders and has its registered headquarters in Doncaster. The trading network extends across Great Britain and Northern Ireland and into Europe, including over 30 active and diverse trading companies in the freight transport business, vehicle sales, plant dealerships and specialist financial support.

The group’s principal activities are described as in transport services, vehicle sales and trailer manufacture.

In Northern Ireland the group owns several transport companies, including Montgomery Transport, East-West Transport and Dukes Transport (Craigavon). In addition to a number of transport companies in England, the group also owns a subsidiary recruitment agency in Poland, as well as a Northern Ireland metal recycling business and an English-based trailer manufacturer.

During the most recent year, Ballyvesey bought the trade and assets of Birds Groupage Services for £4.4m.

Turnover in the year to September 2013 increased by £29m to total £498m.

This 6% increase in turnover may have reflected an expanding range of plant dealerships for a range of brands and an increase in the metal recycling business. Group operating profit fell by 5% lower than in 2012 which, in turn, fell below the unusually high figure of over £11m in 2011. Pre-tax profits also peaked in 2011 and more recently have fallen back.

Direct capital spending increased in 2012 to just over £3m and further to £3.9m in 2013. Annual payments on the lease and purchase agreements of vehicles operated by the group rose to nearly £19m.

Average employment in the group in 2013 was 2,344 people, a further 15% increase on the previous year. The company has a modest dividend policy for shareholders. In each recent year dividends to shareholders have cost £242,000.

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