18 minute read
In focus: The Northern Ireland
report economy
Protocol provides short-term boost but recession looms
Figures depicting growth of the Northern Ireland economy mask the real time effects of rising inflation and a looming recession.
In July 2022, results for the first quarter of the year indicated a 15-year high for economic output in Northern Ireland, just short of a record high registered mid-2007. However, it is recognised that figures lag the real time reality that rising inflation rates make a protracted recession imminent.
Northern Ireland’s economic growth is set against a backdrop of steep economic decline during the initial Covid lockdown stages of the economy. While current data shows that the economy has bounced back quicker and stronger than expected, outstripping the UK’s recovery rate in some areas, it is important to note that the local economy has still not fully recovered to levels prior to the 2008 financial crash (figure 2).
Q2 of 2022 is expected to reflect recovery to pre-2008 levels but a recession is not expected to be evident in official data until later in the year, given its retrospective nature.
In November 2021, Office for National Statistics (ONS) data for the third quarter of 2021 showed that Northern Ireland had outperformed other regions of the UK in its economic recovery, however, output still sat 0.3 per cent below pre-pandemic levels at the end of 2019.
Indications of a potential recession existed prior to the Bank of England’s recent announcement that it was raising interest rates in an attempt to head off predicted inflation of potentially 13 per cent by the end of 2022 becoming embedded in the economy.
Although limited in their data, consumer and business surveys carried out by banks often provide a more real time snapshot of shifts in the economy than older official data. In August 2022, Danske Bank’s Consumer Confidence Index highlighted a second successive quarter of consumer confidence decline, highlighted by the fact that the 26 per cent of people who expected their financial position to worsen over the next year in Q4 of 2021, rose to 40 per cent in Q1 of 2022 and over half by Q2 of 2022.
At the time of the survey, inflation had hit 9.4 per cent and nearly half of those surveyed said they expected to spend less this year, but this figure is likely to rise as inflation moves towards an expected 13 per cent.
For businesses, Ulster Bank’s monthly survey in May 2022, a reliable indicator of the private sector, pointed to a significant fall off in construction and retail activity as an early indication that
140.0
120.0
100.0
80.0
60.0
40.0
20.0
0.0 2006 2008 2010 2012 2014 2016 2018 2020 2022 NICEI UKGDP ScotlandGDP IrelandGDP
Source: ONS
economic recovery may have peaked. By July, it confirmed that the economy was losing momentum, with falling confidence hitting business performance.
Northern Ireland’s economy has for a long time lagged behind the performance of the UK’s economy, as evidenced by a large productivity gap of some 17 per cent below the UK average, making it consistently the worst economic performer of any UK region. This is telling when it is kept in mind that the UK economy’s own productivity growth has been stagnate since the 2007-08 financial crash.
Any level of recession in the UK’s economy, therefore, will almost certainly be reflected in Northern Ireland.
UK economy
In August, the Bank of England (BoE) moved to curb inflation, estimated to rise to 13 per cent by the end of 2022, by rising interest rates 0.5 percentage points, the highest rise in 25 years.
Levels of recession are predicted to match that of the 1990s and household incomes could fall by their largest
Figure 2: Northern Ireland's economic output has still not returned to pre-financial crash levels NICEI and component indices by year, 2006 – 2021 (2019=100) NICEI
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100.0
98.0
96.0
94.0
92.0
90.0
88.0
2006200720082009201020112012201320142015201620172018201920202021
Source: NISRA The NICEI is an experimental quarterly measure of the performance of the NI economy based on available official statistics.
4
8.0
6.0
4.0
2.0
0.0
-2.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
-4.0
-6.0
Northern Ireland United Kingdom
Source: ONS
amount in 60 years. The head of the BoE has said that the squeeze on living standards was inevitable and necessary to bring inflation under control and avoid a harsher economic downturn later.
Consumer price inflation, which hit a fresh 40-year high of 9.4 per cent in June, is already the highest among the G7 group of large economies and the bank forecasts the economy will slide into a 15-month recession later this year, with GDP shrinking by more than 2 per cent from peak to trough.
The downgrading of the UK economy’s growth predictions is largely related to the rise of wholesale gas prices due to Russia’s restriction of supplies. While both the US and the eurozone have also seen rising interest rates to tackle inflation, the UK’s greater exposure to energy price shock than the US and less protection by government measures than the EU make for a bleaker economic outlook.
However, it is important to note that the UK’s economy was already underperforming prior to Russia’s invasion of Ukraine. Despite being able to mitigate the pandemic quicker than
Figure 4: Contributions of component indices to quarterly change in the NICEI*
Q1-2022
NICIE 0.4%
Public Sector
Construction -0.3% 0.2%
Production
Services 0.1%
0.4%
*Please note figures may not sum due to rounding
Figure 5: Seasonally adjusted unemployment rate (age 16 and over), April-June 2007 to April-June 2022
10.0 9.0 8.0 7.0
NI UK
6.0 5.0 4.0 3.0 2.0 1.0 3.8%
2.7%
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Apr-Jun 2007Apr-Jun 2008Apr-Jun 2009Apr-Jun 2010Apr-Jun 2011Apr-Jun 2012Apr-Jun 2013Apr-Jun 2014Apr-Jun 2015Apr-Jun 2016Apr-Jun 2017Apr-Jun 2018Apr-Jun 2019Apr-Jun 2020Apr-Jun 2021Apr-Jun 2022
expected (in September 2021 the UK economy sat 0.6 per cent below prepandemic level despite an original 4 per cent drop predicted by the OBR), economists estimate that when compared to eurozone and US economies, the UK economy is around 2-3 per cent below where it might have been without Brexit.
Longer-term predictions estimate that the UK economy will forgo 4 per cent of economic activity it may otherwise have had.
Protocol
Recent research carried out by the London School of Economics, estimating the longer-run impacts of Brexit, suggest that Northern Ireland will be the UK regional economy least impacted by Brexit, largely due to the Protocol.
The research estimates that the UK economy as a whole will be 1.3 per cent smaller when compared to a no Brexit scenario, but that Northern Ireland’s 0.7 per cent hit will be the smallest of the regions.
The true impact of the Protocol has yet to be realised, with full implementation not yet in place and a move by the UK Government to domestically remove some of the previously agreed arrangements.
ONS figures at the end of 2021 placed Northern Ireland as the fastest recovering region of the UK, albeit from a low base. However, what has become clear is that Brexit and the Protocol measures that are in place currently have shifted trade patterns. The Irish Central Statistics Office (CSO) recently highlighted a 34 per cent (£250 million) increase in trade from Northern Ireland to the Republic of Ireland in Q1 2022, compared to the same time last year.
It is estimated that the value of goods moving north to south increased by 65 per cent (£3.35 billion) in the first year under the Protocol and the trend looks set to continue in 2022. Goods moving to Northern Ireland from the Republic grew at an even larger rate, rising almost 50 per cent in the first quarter when compared to the first three months of last year.
Northern Ireland economy
Internally, the Northern Ireland economy also faces challenges. Prior to rising inflation underpinned by higher energy prices, there was a recognised need to restructure Northern Ireland’s labour market.
The UUEPC’s Spring Outlook 2022 highlights that the demographics of Northern Ireland’s working population is changing. Compared to a 260,000person increase in the working age population in the three decades to 2010, the last decade has seen those aged 16-64 increase by just 15,000, with an estimated growth of just 3,000 in the decade to 2030.
While historically such a problem would be managed by increasing migration to bolster the labour market, Brexit and the pandemic has seen the number of non-UK national insurance applicants fall to just 2,000 in 2020/21, compared to an annual average of 15,000 between 2010 to 2020.
Additionally Northern Ireland’s economy suffers from a ‘missing middle’. The education system is now retaining more people who would previously have entered the labour market with medium skill qualifications and employers continue to put value on higher qualification attainment, meaning a medium skill gap and a squeeze out those of low or no skills.
In May 2022, official figures showed that Northern Ireland’s labour market hit a record 779,000 people in employment. However, by July, indications were that job market recovery was slowing and it is now recognised that amidst a tight labour market, people and skills remain the largest challenge. Contextually, it is important to note that employment growth in Northern Ireland still falls well below the UK average. Northern Ireland continues to have the worst employment profile of the UK regions and has the highest inactivity rates.
Protocol offers protection from ‘poorer and less productive’ UK by 2030
Northern Ireland will be the region of the UK to experience the least Brexit-induced economic decline due to the Protocol, academics from the London School of Economics and the Resolution Foundation think-tank have found.
Despite a reluctance by those opposed to the post-Brexit trading arrangements to identify the Protocol as the reason the economic decline witnessed across the UK has been largely averted in Northern Ireland, when compared to other regions of the UK, the Resolution Foundation’s assessment of the longerrun impacts of Brexit points primarily at the Protocol as the reason for smaller economic contraction.
Northern Ireland will experience economic decline from Brexit, with output falling by 0.7 per cent but this is significantly less than the UK average of 1.3 per cent. With the Protocol removed, it is estimated that Northern Ireland would experience a 1.1 per cent output shock.
The research is based on current implementation of the Protocol, whereby some grace periods are still in operation and so it is recognised that full implementation could have greater economic impacts.
Much economic modelling on the effect of Brexit focused on immediate shocks, specifically a significant fall off of foreign direct investment (FDI). However, the research suggests that, rather than fundamental changes to the UK economy, the main economic impacts occurring are a reduction in household incomes as a result of inflation, as well as lower levels of investment and trade.
Brexit did have immediate impacts on the UK economy. A year after the referendum, sterling was 12 per cent below its previous level and the cost of living had risen by an equivalent of £870 per year. At the same time, business investment fell consistently in the three years post-referendum by an average of 0.1 per cent per quarter compared to growth of 1.7 per cent in the previous three years.
In the longer term, immediately after the referendum, UK exports to and imports from the EU changed little. However, since the implementation of the Trade and Cooperation Agreement, there have been significant changes. The research is quick to point out that many of these changes took place in the context of the Covid-19 pandemic, hence a focus “largely on the relative performance of UK trade with the EU relative to that with the rest of the world, or on the UK’s trade performance relative to similar economies during this exceptional period, rather than changes in the level of UK trade with the EU”.
Estimated falls in gross output by region relative to a no Brexit scenario, shock shown with contribution of future EU integration, and the Northern Ireland protocol: UK, 2030
Output shocks are expected to be largest for the North East, and smallest for London, Northern Ireland and Scotland relative to a no Brexit scenario. Source: The Economy 2030 Inquiry: The Big Brexit
Describing an initial perception of an overall economic impact of Brexit being “a discrete, and relatively rapid, one-off impact”, the research says that the reality is a three-phase impact.
1. The immediate referendum impact whereby household incomes and business investment were impacted by the anticipation of permanent impacts;
2. How trade responds to the new barriers introduced through the
Trade and Co-operation Agreement; and
3. Structural changes to the UK economy over the longterm, as capital and labour adjust to the new trading arrangements.
“Overall, we find that the long-run impacts will mean significant change for some sectors of our economy, but the aggregate effect will be to reduce household incomes as a result of a weaker pound, and lower investment and trade,” the research suggests, although adding that while substantial, this adjustment is not expected to fundamentally alter the nature of the UK’s economy.
The report suggests that while an expected relative decline in imports and exports is not clearly observable in UK data, the data of trading partners suggests UK goods exports to the EU have fallen by more than those to the rest of the world. evidence of an expected relative decline in UK exports to the EU as good news, the report says that signals exist that Brexit is impacting UK trade openness and competitiveness more broadly. Highlighting an eight-percentage point drop in UK trade openness between 2019 and 2021, it states that the UK is the only large European country to experience a decline in openness since 2020, driven by goods trade. As a result, UK goods exports as a share of GDP were 15.7 per cent lower in December 2021 than they would have been in the absence of Brexit.
Additionally, data on trade in international goods points to a broader loss in UK competitiveness, with the UK losing market share across three of its largest non-EU goods import markets in 2021.
“It is unclear exactly how persistent these changes in non-EU trade will prove, but these are worrying signs that Brexit may have had a broader impact on the UK’s openness and competitiveness than expected,” it states.
Forecasting the longer-run impacts of the Trade and Cooperation Agreement, the research predicts an increase in trade costs of 10.8 per cent for exports to the EU and 11 per cent for imports from the EU, rising to 16.2 per cent and 16.6 per cent respectively, when accounting for likely future EU integration. the research suggests that regulated and professional services will be hit harder than most during a substantial change to output. However, the new trading relationship with the EU “will not drive a large or swift labour market adjustment” in the UK economy.
“It is more useful to think of Brexit as driving a fall in openness, rather than a big picture sectoral restructuring,” it states.
Regions
In terms of Brexit’s impact on specific regions, the research says that Brexit will increase the existing productivity and income gaps of the UK’s poorest regions, with the real impact of Brexit being a hit to real wages and productivity, exacerbating the longstanding challenges faced by the UK.
“A less-open UK will mean a poorer and less productive one by the end of the decade, with real wages expected to fall by 1.8 per cent… and labour productivity by 1.3 per cent, as a result of the long-run changes to trade under the TCA. This would be equivalent to losing more than a quarter of the last decade’s productivity growth.”
The research concludes that although uncertainty exists over the Brexit impacts to date, especially because of the economic impact of Covid-19, a lasting impact of substantial reduced openness should be expected, alongside widespread productivity and real income shocks.
Skills:
Retention and attraction key
Ambitions to bridge skills gaps in the Northern Ireland economy should not only focus on the retention of skills in the local labour market, but also enhancing Northern Ireland’s attractiveness to skilled labour from elsewhere, a skills audit has found.
Northern Ireland currently has one of the lowest abilities of all UK regions to attract talent, meaning the importance of talent retention is heightened. However, also highlighted in a recent assessment of Northern Ireland’s skills landscape is the importance of increasing the attractiveness of Northern Ireland to enable the importation of skills outside the local labour market.
Described as the largest net loser of high skilled labour amongst UK regions, Northern Ireland faces not only shortterm labour pressures, exacerbated by the pandemic, but also long-term strategic challenges to develop and maintain an internationally competitive labour market.
The long-standing prevalence of a ‘missing middle’ in the Northern Ireland economy’s skills supply continues to exist, as evidenced by the Department for the Economy’s latest Skills Barometer, and has in fact been exacerbated by the pandemic. Despite widespread acknowledgement of a changing mix of skill requirements, to address demand for the next decade and beyond, employers’ continued preference for highly qualified individuals continues to squeeze out those with low or no qualifications, as evidenced by an increase of those qualified to degree level or above now accounting for 41 per cent of total hours worked in Q3 2021, up from 32 per cent in Q1 2020.
As a result of employer preference, education attainment in Northern Ireland continues to increase with records showing that almost half (49 per cent) of Northern Ireland school leavers transitioned directly to higher education in 2020.
Challenges to ensuring a skills supply suitable to meet the changing demand of the future are also being impacted by a range of other factors including a reduction in migrant labour availability, and highest levels of early retirement, coupled with economically inactive students, for over a decade.
Increased retention in the education system is reducing the annual flow of qualifiers into the labour market and with a larger number of qualifiers achieving higher level qualifications, the labour supply is reduced for occupations and sectors typically associated with lower levels of graduate employment. However, despite this,
Demand and supply balances
Average annual labour market supply gap by qualification (NQF), NI (2020-2030)
Undersupply Oversupply
-840
Level 6+
-1930
-2360 Level 4-5
Level 3 Undersupply
Level 2 560
Less than NQF level 2 270
-3,000 -2,500 -2,000 -1,500 -1,000 -500 0 500 1,000 Average annual supply gap by qualification
Source: UUEPC
Oversupply
there has been little change to the subject profile at higher education, highlighting the need to improve responsiveness to industry demand.
“The overall supply of qualifications in Northern Ireland remains characterised by a ‘missing middle’, with relatively few mid-level skills provided by the education system which directly transition to the labour market,” the barometer states.
On the supply side, in the context of a high economic growth forecast predicting the creation of an additional 75,000 jobs over the decade, underpinned by rapid growth in sectors such as professional services, ICT and advanced manufacturing, future labour shortages are predicted. According to the barometer research, “there is limited scope to rely on catch up in labour market participation to expand the labour supply over the coming decade” and so, maximising labour force participation will be crucial to meet future skill needs.
Northern Ireland’s low ability to attract talent means that replacement demand is key and this is projected to provide a larger quantum of new jobs over the next decade than sector growth. Therefore, addressing changing skills demand will require a significant level of re-skilling and up-skilling of the current labour force. This challenge is not helped by Northern Ireland’s underperformance when compared to other UK regions on lifelong learning measures.
“In a tight labour market learning opportunities linked to career progression paths will become important as firms compete for labour, and seek to retain existing talent,” the barometer states.
On the supply side, the barometer identifies a slight undersupply of skills at degree level or above (NQF level 6+), but suggests that boosting the transversal skills and increasing work placements for graduates could address this by improving employability. A more significant undersupply exists at mid-level (NQF level three to five), reflecting a relatively small number of qualifiers at that level transitioning to the labour market.
Qualifications of NQF level two and below, classed as low-level qualifications, are slightly oversupplied and will continue to be for the next decade. However, the risk of this flipping to undersupply exists if current pandemic-affected enrolment and attainment patterns, coupled with migration flows, persist.
The barometer also identifies a subject imbalance at higher education level, with a particular undersupply in key narrow STEM subject areas such as computer science and engineering, as well as physical and environmental sciences.
Welcoming the publication of the barometer, Minister for the Economy Gordon Lyons MLA says that the identification of labour supply challenges for the coming decade underpins existing policy objectives such as the creation of a culture of lifelong learning and provides clear evidence of the need to urgently address the digital skills challenge.
Outlining ongoing work between the Department and various stakeholders to “ensure we develop a skills system matched to the needs of a globally competitive small advanced economy”, he adds: “Addressing the skills imbalances is key to driving economic growth and delivering on our societal ambitions. We must ensure people are equipped to meet the changing demands of the labour market now, and in the future, as we strive to become one of the leading small economies of the world.
“I am confident the latest edition of the skills barometer will help people to make career and subject choices and in turn assist businesses as we build the pathway to a 10X economy.”
Source: UUEPC
