Belfast Telegraph

List of top 100 raises questions over how to raise productivity

Economy Watch

By Neil Gibson, chief economist EY Ireland

The Belfast Telegraph top 100 firms is always an encouraging publication, reminding readers of the world class firms in the region and demonstrating how profitable firms can be in the smallest of the UK regions. Given that economic commentary is usually fixated on growth, productivity or fiscal balance, it is nice to look at who is doing well for a change.

Against a backdrop of Brexit uncertainty and the lack of an Executive, the number of firms in the list with more pre-tax profits than a year ago is particularly noteworthy (roughly 65% of the list). Though banks and utility companies sit atop the list, when considered in tandem with the top employers list, the overall picture is one of wide sectoral variation, with services, production, agriculture and retail all represented.

Putting this data alongside the record low unemployment, rising real wages and appreciating house prices, it becomes easier to see why there is a growing scepticism over economists’ constant warnings of impending doom and talk of a ‘productivity crisis’. This is worrying as, undoubtedly, there are very significant underlying weaknesses in the local economy. That is not to take away from the positivity that the strong labour market should elicit, nor detract from the achievements of the top 100 firms, but rather a recognition that firm level success does not necessarily mean that the wider economy is performing as well as it might.

The responsibility of profit

Profit has become a rather tarnished word. The understanding that firms need profits to invest in new equipment, processes and to acquire and spend on R&D is sometimes forgotten, as are the tax revenues that flow from successful business through profit, employment and consumption taxes. Having said that, the reality is that publication of a list of profitable companies in 2019 will generate considerable debate. Consumers instantly think of the possibility that firms could have cut prices for the goods and services they buy at the expense of a little profit. As with most things in economics, the debate is complex, but it is true that the narration of profit figures has changed markedly in recent years. Firms increasingly look to report on the benefits they bring to their customers and the wider economic and social benefits they bring through their activities. The profit they make may be critical for their investors or shareholders, but the measure of their value is becoming more rounded and holistic. This is analogous to the debate ongoing in economics to go ‘beyond GDP’ and think of more broad measures of what constitutes success. The £1.8bn of pre-tax profit in the Top 100 table will flow through economies in various ways. Some will go back into firms, to investors, to shareholders and to owners. While there is considerable debate as to where the money goes, the journey does not end with the figures published in Top 100 table.

Many more?

It has often been said that, as a region, Northern Ireland’s private sector is too small and that it needs more firms similar to those in the Top 100 list. So how significant is the Top 100 group? Very crudely, Gross Value Added (GVA) can be approximated to be the sum of wages and profits. Estimating a few missing values, there is £1.8bn of profit within the firms on the list, £2.7bn of wages and close to 81,000 jobs. Summing up the wage bill and pre-tax profit figures in the list, is equivalent to about 11% of the NI published GVA figure (estimating a few missing observations). This is without considering any supply chain or knock-on spending effects. The crude measure of productivity (or GVA per worker) is approximately £55,000, which is above the NI average, which is closer to £45,000. This would be expected, given it is the region’s largest firms. These are only very crude estimates and they assume that all the profit and employment is in NI and, therefore, within the official statistics (firms reporting no employment are excluded from the productivity measurement). If it was possible to double the list and add another 80,000 jobs this would comfortably push the employment rate above the UK average and would make a meaningful contribution to closing the productivity gap. This is, of course, easier said than done. For a start, the firms that service the local market are demand driven, so it would not be possible to add more in those sectors without displacing the existing firms or growing the size of the economy. That leaves the exporters, who are a smaller sub-set of the list, and even they would be impacted by increased competition. The policy goals for the region are a mix, as they should be, of growing more local firms to reach the levels of performance in this list and attracting new players to join the list. Aspiring to more of the type of firms in in this list would be part, but not the sum-total, of our vision. 

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Job well done in a tough climate

I am delighted to see the top employers presented alongside the most profitable. A number of previous Economy Watch articles have made the point that this is the most important metric to citizens and, by extension, politicians. The concerns raised by Brexit, a lack of Executive, the high inactivity rate, the fiscal deficit or the low productivity levels in Northern Ireland, deserve the debate and attention they get, but there is much to celebrate in this list. Well done to all the firms listed and to John Simpson and his team for the hard graft in compiling them. Profits are hard earned in a global world and success should be celebrated. Deployment of a proportion of this profit will ensure the benefits reach well beyond the impressive £4.3bn of wages and profits and 81,000 jobs that make up the Top 100 firms list.

Belfast Telegraph