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Esmond Birnie

Coronavirus casts dark shadow over Northern Ireland economy with risk of another prolonged recession and a badly damaged labour market

Esmond Birnie


Royal Avenue in Belfast city centre shortly after the lockdown began

Royal Avenue in Belfast city centre shortly after the lockdown began

Royal Avenue in Belfast city centre shortly after the lockdown began

Yesterday the Office for National Statistics provided some of the first official, statistical confirmation that the UK, including Northern Ireland, is in the early stages of what will be a very deep recession.

During Quarter 1 - January to March 2020 - UK output (GDP) declined by 2%. You have to go back to the early stages of the 2008/09 recession to see anything which was comparable.

Output decline was particularly severe in UK services - output dropped by 6% in the month of March alone - and household spending.

Of course, the lockdown really began to bite around March 23 - towards the end of Quarter 1.

According to the Office for Budget Responsibility (OBR) and the Bank of England this is only the beginnings of the economic slide - expect a decline in Quarter 2 of 20% or more.

What might this imply for Northern Ireland?

First of all, two caveats about the ONS data: it isn't broken down by region and it is provisional - the measures of output change in March include a lot of estimates.

The most recent official data for the size of the Northern Ireland economy takes us only as far as December 2019.

However, it seems reasonable to assume that we will be following a similar path to the rest of the UK economy.

A recent projection by UU Economic Policy Centre was that a three-month lockdown - and the publication of the Executive's plan on Tuesday implies that lockdown restrictions are more likely to last into a second Quarter - would be accompanied by a 10% decline in 2020 GDP.

Even more important than the question as to extent of Covid recession in Northern Ireland is the question of whether the subsequent recovery will be equally sharp?

Will the profile of our Covid recession be V-shaped, such that a decline in GDP of 10% in 2020 might be followed by growth of more than 10% in 2021, which would mean that by the end of the second year output would be more or less at the same level as it would have been on the pre-virus trend line?

Whilst there are very great uncertainties about all of this, there are strong grounds for believing a V-shaped recession is unlikely in the case of Northern Ireland.

If anything we may looking at a U-shaped or L-shaped profile over the next few years.

It will take several years to claw our way back to where we were in 2019 and the implication will be that the Covid recession will impose lasting costs.

There are several reasons why the local economy is more likely to follow such a L- or U-shaped profile.

The last recession in Northern Ireland, the one which followed the banking crisis, was extremely protracted.

According to the official measure of the volume of regional output, output peaked in Quarter 2 2007 and then declined all the way through to Quarter 2 2013.

This time could be different but it would seem the Northern Ireland economy has form in terms of allowing downturns to become very long lasting recessions.

There are has to be a strong risk that history will repeat itself especially given the virus has generated so much uncertainty and reduced business confidence very substantially.

Unfortunately, there is precedent for not only very prolonged recession but also for the recovery phase being rather shallow.

Again according to the index of output in Northern Ireland, the most recent measure of output (for Quarter 4 2019) remained about 4% below the pre-banking crisis peak in mid 2007.

In a strict sense the local economy had not completed its recovery from the last recession before Covid-19 struck.

Long before the virus struck the Northern Ireland economy was characterised by relatively low levels of competitiveness - especially in terms of labour productivity levels - when compared to the rest of the UK or various standards of best practice.

This suggests that the region may not be well-placed to demonstrate the flexibility and adaptation which may be a pre-requisite of recovery.

Scarring or permanent damage produced as a result of the lockdown recession are very likely to be concentrated in the labour market.

Northern Ireland starts from a position of disadvantage.

During 2010-20 the rate of economic inactivity in NI was generally 5-6% percentage points higher than the UK average: in December 2019-February 2020 25.6% compared to 20.2%.

Esmond Birnie, Senior Economist, Ulster University Business School

Belfast Telegraph