QES Survey

NI Chamber and BDO Survey Shows Signs of Recovery but Rising Price Pressures Emerge

Fifty three per cent of Northern Ireland’s manufacturers are expecting to raise prices over the next quarter, the highest share recorded since the time of the financial crash. According to results from the Quarterly Economic Survey for Q1 2021, carried out by NI Chamber and BDO NI, price pressures are coming to the fore. Almost all (92%) manufacturers are experiencing pressures from rising raw materials costs, resulting in expectations of raised prices in the next three months.

The survey does however suggest some signs of recovery in the Northern Ireland economy during the first quarter of 2021, particularly in manufacturing, but with some way to go to recover all of the lost ground precipitated by the COVID-19 pandemic.

Confidence and investment intentions

Business confidence has continued to improve in Q1 2021 after the large collapse experienced at the start of the pandemic. In fact, the business confidence indicators are positive in Q1 2021, meaning that more businesses believe that their business turnover and profitability will grow over the next 12 months compared to those who believe that it will fall.

New trading arrangements

Two in five businesses (41%) reported difficulties in adapting to new trading arrangements for their business/supply chains, with 14% findings them very difficult. Fifteen per cent have found the new arrangements relatively easy to deal with, while 18% believe it is too early to say. According to the survey findings, new arrangements appear to be impacting on trading relationships for some businesses, particularly in terms of trade with Great Britain. Eighteen per cent of members stated that the new arrangements have had a major negative impact on their trade with Great Britain and 34% have experienced a minor negative impact.

However, the same survey also shows that two in three members (68%) believe Northern Ireland’s status post EU Exit presents opportunities for the region. Nearly half (47%) believe the new trading status will present opportunities for their own business going forward.

COVID-19 impact

Members’ initial reaction to the COVID-19 crisis was very stark, particularly in Q2 2020. Signs of improvement have been reinforced in Q1 2021, with 54% of members stating that they traded well or reasonably during the quarter. However, conditions remain very challenging for a sizeable minority of around 1 in 3 members, with 15% seeing no signs of improvement at all.

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

Ann McGregor, Chief Executive of NI Chamber.

“Price pressures are emerging as a significant concern from Q1, particularly in the manufacturing sector. Hikes in the price of raw materials are a significant factor, but we also know that there are multiple other escalating costs contributing, including higher logistics costs and significant additional costs associated with trading during COVID-19. Over the course of the next quarter, we can expect to see a sizable portion of these price rises passed on to the consumer, as firms simply cannot afford to absorb them.

“The survey does show that some of the lost ground experienced in the economy since the start of the pandemic has been recovered and confidence is starting to return, particularly in manufacturing. However, we must temper this with the reality that large parts of the economy are still shut down, there remains significant spare capacity and many key balances remain negative, meaning that there are still more businesses in Northern Ireland reporting falls in domestic and export sales/orders, cashflow and investment than those reporting an increase.

“This is the first Quarterly Economic Survey since new trading arrangements came into effect on 1 January after the end of the EU exit transition period. In Q1, some members have reported significant difficulties. NI Chamber has been working closely with businesses adapting to the rules and we know that there are multiple factors leading to these difficulties. For example, issues with the technology are hindering their ability to complete the cycle of customs clearance requirements. An onerous volume of information is needed and in many cases the actual data is inaccessible. Issues around what is defined as goods ‘at risk’ continue to be troublesome. In addition, defining origin is a challenge, with companies unsure how to classify their products.

“Our members tell us that there is also a significant level of misunderstanding among customers and suppliers about Northern Ireland’s trading status both within the UK and with the EU, which is contributing to delays, additional paperwork and costs. In some cases, it is also triggering EU and GB customers to source goods elsewhere. There is therefore an urgent need to educate customers and suppliers in new trading arrangements.”

ANALYSIS

BY BRIAN MURPHY, MANAGING PARTNER, BDO NORTHERN IRELAND

Brexit and COVID-19 continue to be the major factors impacting business performance. However, the survey shows that some local firms are now quietly confident about their growth prospects over the next twelve months.

All progress must be welcomed and whilst the survey indicates signs of recovery, there is still a way to go to recover the lost ground brought on by the pandemic.

The degree of confidence varies significantly between sectors, with manufacturing showing progress in areas including future employment and turnover compared to the previous quarter of 2020. A key obstacle for future growth within that sector will be balancing the pressure of rising costs with the need to raise prices. The survey tells us that of the 92% of manufacturers experiencing pressures from rising costs of raw materials, 53% are expecting to raise their prices as a result.

Trade and cashflow also remain significant challenges for businesses. Those businesses that have sufficient cash reserves are likely to bounce back, with many predicting a short-term “boom” when COVID-19 restrictions are lifted. This may cause its own issues with insufficient capacity, complicated further by any ongoing social distancing measures. As we progress through 2021 it is likely that the Government-funded COVID-19 relief packages will be phased out and businesses will need to keep a watching brief on cash outflows as they try to build resilience.

Following the end of the Brexit transition period in December 2020, businesses have been adapting to the new trading arrangements, which have proved both complex and costly for many.

The first survey since the end of the transition has shown that around half of firms are finding the new arrangements difficult to work with, three times higher than those finding it acceptable. The new trading arrangements are affecting trading relationships negatively for some businesses, particularly with Great Britain.

It is not surprising that it is taking time for businesses to adapt to the new trading regime post Brexit. Considerations such as customs declarations, VAT registration requirements, goods regulations and VAT accounting under the NI protocol are just a few of the implications that businesses must navigate.

Northern Ireland’s position post EU exit is seen as an opportunity for many businesses, with 68% believing it presents new prospects for the region, while 47% believe the new trading status will present opportunities for their own business going forward.

There is no doubt that businesses will need to adapt their operating models for both the medium and long term and identifying these opportunities will play a vital role in securing a sustainable future for many. The survey demonstrates that businesses are exploring these opportunities further, with 38% planning to consider new markets, 37% with plans to increase their marketing and communications activity and 29% planning to take on new staff.

Over the last twelve months, businesses have had to re-evaluate and rethink their operations as a response to a very challenging environment. Their aim is to ensure they are best placed to take full advantage of new opportunities within their respective marketplaces. We cannot be complacent though and we still need to be mindful of the legacy issues that the pandemic has left us with if we want to build a sustainable recovery.

Brian Murphy, Managing Partner of BDO NI.