4 minute read
John Campbell
A Milder Economic Climate
BBC NI’s Economic & Business Editor, John Campbell, discusses the economic rise and fall since the pandemic.
Back in early 2020, as we were facing into the pandemic, one of the most economically comforting things you could read was a 2009 paper by the economist Simon Wren-Lewis and his colleagues.
It explained that we were in for a dramatic short-term hit to GDP but that the economic bounceback would be rapid – the ‘v-shaped’ recession and recovery. The work they did was based on previous flu epidemics which allowed for the assumption that most of the damage would be contained to a single quarter and that over the year the impact would be a mild recession.
They modelled another ‘severe’ scenario, which involved school closures and changes in consumer behaviour made in an attempt to avoid infection. That scenario envisioned an output fall of 29.5% in the first quarter of the pandemic and a 6% hit for the year. Wren-Lewis wrote: ‘That is a very severe one-quarter recession, but there is no reason why the economy cannot bounce back to full strength once the pandemic is over.
‘Unlike a normal recession, information on the cause of the output loss, and therefore when it should end, is clear.’ In the middle of 2020 I can’t have been the only one who was gloomily sceptical of the analysis. With no sign of a vaccine and a stumbling policy response, a longer ‘u-shaped’ recession seemed a real possibility. But the Wren-Lewis work has held up pretty well – the biggest one-quarter hit to UK GDP was 20% while the fall for the whole of 2020 was almost 10%.
And the bounceback certainly showed up. We now have lots of local data for 2021 which shows just how strong it was. NISRA’s headline Composite Economic Index suggests that the Northern Ireland economy had recovered to its prepandemic level of output by the second quarter of 2021. By the time we got to the final quarter of 2021 things were motoring along: output at a 13-year high, a level last exceeded in the middle of 2008.
That was driven by the services sector, even though there was a relatively weak performance in retail. Business services looks to have had a particularly good 2021 which is not surprising when you look at the strength of the housing market, meaning lots of work for solicitors, estate agents, bankers and mortgage brokers. A total of almost 30,000 homes were sold in 2021, the highest number since the gogo days of 2006 when there were 41,000 sales.
Tourism also had a decent summer as local providers experienced something of a staycation boom. I recently spoke to Tourism NI chief executive John McGrillen for Radio Ulster’s Inside Business and he told me summer spending from Republic of Ireland visitors was up by as much as 50% on 2019. All this activity is reflected in a rapidly recovering labour market: April was the tenth month in a row that that the number of payrolled employees was above pre-Covid levels. However, self-employment has barely recovered and our chronic problem of economic inactivity remains. And the question now becomes what shape the post-bounceback slowdown will take – will it just be a return to trend growth or something more unpleasant? The occasional amber light is now flickering on the economic dashboard. NI Chamber’s own survey for the first quarter (pre-the Russian invasion of Ukraine) suggested that positive momentum was continuing, but inflation is a growing problem.
It appears to be weighing on manufacturers in particular, weakening cashfl ow and profi tability and prompting a rethink on some investment plans.
Danske Bank has also revised its Northern Ireland forecast down to 3.6% for this year; back in the middle of last year it was forecasting 2022 growth of closer to 5%. For now the ‘r word’ is not really featuring in most public discussion. But economists are thinking about it as they process what is happening to living standards. The economic historian Duncan Weldon recently wrote on his Substack that he was surprised how little discussion there has been about the possibility of a UK recession this year. His central point was that the offi cial OBR forecast expects consumers to generate about 90% of UK growth this year. But that’s at the same time as household fi nances taking their biggest hit since at least the 1950s.
That’s been echoed by the Ulster University economist Mark Magill who points out that ‘Northern Ireland household consumption accounts for almost two thirds of GDP – thus it is diffi cult to absorb large contractions in the consumer side of the economy without tipping into recession.’ So, enjoy the milder economic climate for now. There could be a cold winter to come.
