Andrew Webb, chief economist of Grant Thornton, on the prospects for sustained recovery
A little over a year ago the conversation in economic circles was fixated on the ‘recovery alphabet’.
Would we see an immediate bounce back V-shaped recovery, a longer downturn U-shape or a double-dip W-shape?
Some even wondered if we would see a K-shaped twin track recovery, with some sectors taking off while others declined.
The stop-start nature of our restrictions at the end of 2020 and in the first half of this year added to the sense of economic uncertainty.
The economic mood did, however, improve dramatically when the vaccine roll-out gathered pace and restrictions began to lift with a greater sense of permanence (notwithstanding that the pandemic is far from over).
The most recent current economic statistics for Northern Ireland’s economy are suggesting that the economy is broadly operating at pre-pandemic levels.
Construction output in the second quarter of this year increased by 53% over the year. The construction output index, at 104.7, is above pre-pandemic levels and well advanced on the 68 reading recorded in Q2 2020.
The services sector has experienced a much more ‘stop-start’ path over the past 18 months. Consequently, output in this sector bounced back strongly last summer, boosted by the ‘eat out to help out’ scheme and domestic tourism, but declined sharply again over the autumn and winter.
Encouragingly, the latest output index reading of 99.4 is just shy of the pre-pandemic reading of 100.6.
A surprisingly strong summer season for our hospitality sector should see this services output index improvement sustained, if inflationary and labour market shortage headwinds do not derail it.
The production sector has recorded a clear V-shaped recovery and had broadly recovered to pre-pandemic output levels by the end of 2020.
Much of the recovery in the production sector has been through manufacturing’s performance, which seems to be displaying a renewed confidence.
Indeed, at the time of writing this article, Almac has just announced 1,000 new jobs for Northern Ireland.
Almac’s 1,000 new jobs is a notable statement of confidence in our economy
This is a notable statement of confidence in the Northern Ireland economy and supports Grant Thornton’s view, based on our new economic forecast model, that a significant element of future employment growth will come via manufacturing.
Grant Thornton’s Northern Ireland forecast model suggests 5.1% growth in 2021 and 6.4% growth next year. Many factors drive our economic outlook, including:
Government boosterism: Globally, governments are injecting recovery funds into their economies. The US has approved almost $2tr in their relief bill and the EU has injected over €800bn. While not quite boosting it like President Biden, the recent UK Budget delivered spending increases and infrastructure investment plans aimed at softening the blow from Brexit and Covid. Locally, city and growth deal money should start to flow before too much longer, supporting growth.
Hybrid working: The future of the workplace is hard to call. A survey of 1,000 local workers by YouGov on behalf of the Chartered Institute of Personnel and Development in August suggests that only 3% wanted to return to their office full time. Of those working fully from home, more than 80% said they wanted to continue with that arrangement.
Of course, what employees want and how employers decide to run their businesses can be different. Our forecasts assume a hybrid working model that averages three days a week in offices. This has an impact on retail performance through reduced footfall and passing trade.
International travel: The tourism sector was enjoying great success before the pandemic and we expect that success to continue when international travellers are able to return. Our expectation is that international travel will reach pre-pandemic levels by 2025, supported by major events such as the return of The Open Championship. While international travel is not expected to return to pre-pandemic levels, the domestic tourist has gone some way to filling the gap.
Of course, economic conditions can change quickly, and while we are predicting strong growth this year and next, there are items that are on the ‘watch list’ that could derail the relatively upbeat outlook:
Inflation: As economies reopened, demand for some goods increased sharply. Some businesses have struggled to meet extra demand due to shortages in materials (for example the microchip shortage that is hindering a lot of manufacturing, particularly cars) and labour. Other costs, such as shipping and energy costs have also increased dramatically.
For example, shipping costs in August were almost 400% higher than in January 2019 and no one can fail to have noticed the rapid increases in oil and gas prices. We regard the current inflationary pressures as largely transitory and expect that most of the issues causing the current inflation rate will pass through in the next 6 to 9 months.
Labour market challenges: The mass redundancies that many feared would occur during the pandemic largely failed to materialise, thanks in significant part to the furlough scheme. Since the economy reopened, the labour market has been buoyant. The online recruitment portal, Indeed, reports that vacancies levels are above where they were before the pandemic. This buoyancy is bringing some challenges, with reports from various sectors of recruitment difficulties. In some cases this is acting as a brake on the recovery.
Uncertain consumers: UK consumer confidence has fallen back over the past three months, which appears to be driven by concerns over personal finances in the year ahead. Sentiment is a highly reactive and sensitive indicator and has invariably been impacted by the recent GB fuel crisis and increases in home heating and electricity. If this lower confidence carries through to spending decisions, the risk of an economic slowdown next year increases significantly.
Protocol concerns: ‘Get Brexit Done’ was the key slogan in the 2019 UK election. As we head into 2022, Brexit seems far from done and issues around whether the NI Protocol continues are front of mind for many businesses.
The resilience of the companies that make up the Top 100 companies presented in this year’s report is worthy of celebration.
After a tumultuous 18 months, the forecast looks more settled but the risks from headwinds are never far away.