Quarterly Economic Survey

Business Confidence Holds Up Despite Significant Cost Pressures

Christopher Morrow, Head of Communications and Policy at NI Chamber and Brian Murphy, Managing Partner at BDO NI pictured at the launch of the latest Quarterly Economic Survey (QES).

• All key economic indicators positive in Q4 21, signaling improving trading conditions • 70% of NI Chamber members expect their business to grow in 2022 • More businesses are reporting increased UK sales (35%) in the last three months compared to those reporting falling sales (18%) • 74% expect to raise prices in the next three months – the highest figure on record • 72% are trying to recruit, with 86% facing recruitment difficulties

Most businesses in Northern Ireland expect to grow in 2022, according to the findings of the latest Quarterly Economic Survey (QES) published by NI Chamber and BDO NI.

However, inflationary pressures from mounting business costs including high raw material costs and pressure to raise wages caused significant concern during Q4 2021, particularly for manufacturers. Expectations to raise prices are the highest on record, with a greater share of businesses in Northern Ireland expecting to raise prices in the next three months compared to all other UK regions.

The share of businesses operating at full capacity rose to 45% in Q4 21 (39% in Q3 21) for manufacturing and 50% for services (47% in Q3 21), although over half of businesses are still operating below capacity.

Brexit and the NI Protocol

In the Q4 21 survey, firms were asked about the overall impact of EU exit on business performance over the last year. 23% of firms said it had a major negative impact on business, 39% a minor negative impact, with 21% stating it has had no impact to date. There has been a minor positive impact for 7% of businesses and a major positive impact for 3%.

Businesses were also asked how they have adjusted to new trading arrangements. In Q4 21, 57% said that they had adapted to the new trading arrangements (compared to 45% in Q3 21, 44% in Q2 21 and 15% in Q1 21). There is a core of around 15% of businesses that are finding the new trading arrangements extremely challenging (13% Q3 21).

In terms of resolving issues that have emerged with the NI Protocol, 39% of members believe that these issues can be resolved in the next year, while 31% do not believe that they can within that time frame.

Prospects for 2022

The outlook for business and the economy for 2022 is much more positive than has been the case in recent years. 58% of members believe the Northern Ireland economy will grow in 2022, up from just 19% for 2021. However, there is still quite a sizeable minority, 1 in 4 (24%), who believe that the Northern Ireland economy will contract in 2022.

Businesses are particularly optimistic around their own prospects, albeit that for some businesses this is coming from a particularly challenging trading position in the last two years. 70% believe their business will grow in 2022, up from 44% in 2021. In fact, 12% believe that their business will grow strongly this year. However, 1 in 7 (14%) believe that their business will contract in 2022. Only 1% believe their business will decline strongly, the lowest recorded figure since prospects were first recorded in 2017.

Commenting on the survey findings, Ann McGregor, Chief Executive, NI Chamber said:

“It is encouraging to see that confidence is keeping up in spite of challenges, particularly around pressure to raise prices. These Quarterly Economic Survey results indicate that there is much to be optimistic about at the beginning of this New Year. However, while there are many positives, we must also be realistic about the fact that multiple, serious challenges persist.

“We know from members that inflationary pressures are very acute at the moment. Rising raw material costs are significant, particularly for manufacturers, driven by factors including COVID-19, supply chain disruption and EU exit. There also appears to be growing pressure on businesses to raise wages.

“At some point, firms have to pass on these cost increases and what we are now seeing is that expectations to raise prices are the highest on record among our members. A bigger share of businesses in Northern Ireland are expecting to raise prices in the next three months compared to all other UK regions, which could damage our regional competitiveness over time.

“It is clear that adapting to new trading arrangements has been a challenge for many and that outstanding issues with the NI Protocol need to be resolved. Despite this, survey responses in Q3 21 indicated that almost 70% of our members believed that the unique trading position as a result of the NI Protocol presents opportunities for the region.

“As the UK and EU negotiators resume their discussions, we urge them to come to a timely and clear agreement to give businesses the clarity and certainty they need and that they build in transition periods to avoid further cliff edge deadlines.”

ANALYSIS

BY BRIAN MURPHY, MANAGING PARTNER, BDO NORTHERN IRELAND

What a difference a year makes. Last January, the business community reported negative outcomes on all key indicators relating to the Quarterly Economic Survey, with sales, recruitment, investment, and confidence falling to a level that was having a detrimental impact on the future of many businesses in Northern Ireland.

A year on, the positive reporting in Q4 (2021) of the very same indicators sees a foundation for recovery that we have not witnessed at any other time during the pandemic. Considering the scale of the challenges we have faced in the last two years, to be in this position is a real testament to the resilience, commitment and adaptability of the business community.

The manufacturing sector is demonstrating a growing confidence with investment intentions at a six-year high. A better cash flow position for many companies within manufacturing will have contributed to this renewed confidence, the first time we have seen a positive cash flow position for manufacturing since 2018.

That said, manufacturing faces significant challenges, particularly around the rising costs of raw materials and the resulting price rises that are expected. This is further impacted by increased wage settlements; we are higher than any other UK counterpart in this area. This disparity will add further pressure to the industry in terms of competing with GB.

The services sector also faces rising cost pressures, with NI reporting the highest concerns across the UK. The sector also reported drops in domestic and export trade. Similar to manufacturing however, confidence has continued, with 70% expecting their business to grow as the industry continues to show strong regional performance.

Recruitment activity remains high, with the services industry displaying the strongest performing region in terms of investment in training; and expectations around employment growth for manufacturing at its highest on record. This is caveated by ongoing challenges accessing the right people for roles in the industry and this will likely continue into Q1 of 2022.

We’ve seen staffing levels across industries impacted because of the ongoing COVID situation and subsequent isolation rules. Accessing a range of recruitment options to alleviate this pressure will be a key part of recruitment strategies for many businesses going forward.

COVID-19, along with post-Brexit requirements are leading to shortages in raw materials and workforce, this is having a knockon impact for many businesses who do not have the resource to continue full operations. Currently 52% of companies are operating below capacity.

The wider implications of Brexit are still being felt, with more businesses adapting to new trading arrangements (57%), but 36% of companies finding the new arrangements challenging. It is encouraging though that businesses are showing a commitment to working with these new arrangements and finding workable solutions to allow them to compete in their respective marketplaces.

COVID-19 is no longer viewed as something that will subside in the medium term; rather businesses have accepted that they must operate alongside the pandemic, demonstrating the required health and safety elements that will protect staff, customers, and partners. It is encouraging to see that 82% of businesses were trading positively despite COVID, however more support is required for those companies struggling, or worse, who are on the verge of closure (15%). SMEs have always been at the heart of our local economy and it is now that we must do all we can to support them.

Looking at Northern Ireland’s position in relation to local economies, in Q4 2020 we were lagging at the bottom for almost all key indicators, struggling to put our stamp on areas where we generally excel. Twelve months on, we have completely overturned this, improving our position in almost all indicators and a notable 70% companies expecting an increase in their performance and 58% expecting economic growth. This sentiment should not be undervalued.

To predict what Q1, or any quarter of 2022 will look like would be unwise; the ever-changing landscape in the local and national economy makes predictions difficult. What we can do now is support businesses in planning for their futures, understanding and navigating the challenges they still face and where possible, provide additional support. As a business community we have built a strong foundation for our long-term recovery. The next steps will be to overcome inflationary pressures, simplifying trade across borders and managing the impact of COVID-19. We’ve come a long way in twelve months and we need to seize every opportunity that comes our way in 2022.