EY Economic Eye Winter 2014

Economic Eye

Summer Forecast 2015

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A year of strong growth in ROI…

The all-island economy had a remarkable 2014, with 4.8% economic growth in ROI and 2.8% in the UK – faster than in all other G7 and Eurozone countries.

In NI, economic growth is estimated to have been slower, at 1.7%, and ROI had double-digit export growth of 12.6%. IDA Ireland enjoyed a record year for FDI, employment continued to grow, and unemployment fell below the psychological 10% barrier at the start of 2015.

…while the NI economy has also picked up

Although NI’s rate of economic growth in 2014 lagged behind the ROI’s and UK’s, it was still an improvement on 2013’s.

The labour market may be a more accurate barometer of NI economic health than GDP growth. Employment grew by more than 12,000 net jobs in 2014, and unemployment fell. Similar to ROI, 2014/15 was a record year for FDI for InvestNI, reflected in impressive growth in professional services employment.

How sustainable is last year’s performance?

The key question posed by the Economic Eye Summer 2015 report is how sustainable this strong 2014 performance will be.

This can be addressed by analysing the unique all-island Economic Eye Summer 2015 outlooks through the lens of growth, business conditions, consumers, industries and risks. These factor in the latest data and trends, domestic and international outlooks – including demand in key export markets, exchange rates and commodity prices, government policies and geo-political events.

The two core messages are:

  • 2014’s exceptionally strong performance will moderate in the coming year. ROI GDP growth is forecast to slow from 4.8% to 3.7%, while net job creation in NI is forecast to halve to 6,000 jobs.
  • Despite this, the near and medium-term outlook, the sustainability of growth, and the balance of risks is still favourable for ROI, and more positive than for NI.

Looking forward: robust growth in ROI…

The Economic Eye Summer 2015 forecasts ROI GDP growth of 3.7% in 2015, and 3.0% on average from 2016 to 2020 – a robust performance, and a stronger outlook than for both the NI and UK.

…supported by the strengthening domestic sector

The long-awaited recovery of ROI’s domestic sector is underpinning a more broad-based, sustainable recovery.

This is filtering through more strongly to the labour market than the more export-led recovery of recent years. While export growth is pivotal for a small, open economy, it is this domestic pick-up that will drive a recovery in disposable household income.

A reviving property market and the expectation of a new public capital spending programme can further underpin ROI’s construction sector recovery. The Spring Statement’s announcement of an end to austerity in the 2016 budget, with fiscal room for rising spending and tax cuts, will also boost the domestic sector.

NI growth will lag ROI and UK…

By contrast, NI GVA growth of 2.0 % in 2015, and 2.0 % on average from 2016 to 2020, will lag both ROI and UK growth.

According to the Economic Eye, annual net job creation in NI is predicted to slow from over 12,000 jobs in 2014, to an average of 4,000 per year to 2020.

…as austerity continues and the strong pound hurts NI exports

The period of austerity – which is coming to an end in ROI – is set to intensify in NI.

The recent UK election delivering a majority Conservative government has confirmed tough future cuts. The strengthening of sterling versus the Euro already appears to have hit NI’s export sector in 2014, and changes to EU State Aid rules will reduce InvestNI’s ability to continue offering financial incentives to FDI firms.

Risks remain for both ROI and NI…

There are multiple downside and upside risks: a Greek exit from the Eurozone, potential UK ‘Brexit’ from the EU, and ongoing issues from a failure to implement aspects of the Stormont House Agreement, such as welfare reform, standout.

…with those for NI more weighted to the downside

While the balance of risks weighs more heavily on the downside for NI than for ROI, there are important downside risks for ROI and upside risks for NI which could alter all-island prospects.

For ROI, skills shortages in sectors like IT, ongoing bank lending restrictions, and an uneven economic recovery over-dependent on Dublin and other urban areas, could all lead to lower than predicted growth.

For NI, the devolution of corporation tax powers is still on the table, and the economy remains highly competitive in terms of wage costs.

Despite austerity, large parts of the NI economy do not depend on public spending and are thriving, with positive employment outlooks for sectors such as IT and professional services. All of this could affect the future absolute and relative positions of both economies.

 Indicators to keep an eye on

  • Economic growth, including for key trading partners (UK, US and the Eurozone), and China, where growth is slowing
  • Employment, unemployment and net migration
  • Sectoral employment and output
  • Domestic sector indicators: consumer spending, consumer confidence, retail sales, investment, construction, housing market
  • Earnings growth and disposable household incomes
  • Euro-£, Euro-$ and £-$ exchange rates
  • Exports and NI external sales to GB, including performance of sectors competing on an all-island basis, like agri-food and tourism, and export performance by destination market
  • Inflation and world oil prices
  • FDI, including the impact on NI FDI of the change in EU State Aid rules
  • Bank lending in ROI
  • Skill shortage measures
  • US interest rates and knock-on global impacts, especially for emerging markets
  • UK productivity.

 Developments to keep an eye on

  • Greece’s negotiations with creditors, and its Eurozone membership
  • OPEC oil production decisions
  • UK EU referendum developments
  • ROI 2016 autumn budget, including details for capital and other spending measures, and tax cuts
  • The UK budget on 8 July
  • NI Stormont House Agreement negotiations, including issues and decisions related to the budget, welfare reform, and corporation tax.