- Northern Ireland is projected to grow by 5.9% in 2021 and 4.1% in 2022
- The labour market is expected to recover to its peak by 2024
- There is a material risk that a period of price inflation could be on its way
- A new era of innovation and investment presents opportunities for the region
EY’s latest forecasts for the island of Ireland suggest a very strong period of economic growth will follow the re-opening of the two economies. Northern Ireland GDP is projected to grow by 5.9% this year following a fall of 10.1% in 2020. The recovery is expected to continue into 2022 with growth of 4.1% projected.
The economic recovery has been delayed somewhat by the restrictions in the first half of 2021 and the period of fast growth is now expected to be spread over late 2021 and early 2022. In employment terms, the road back is projected to be longer, with jobs not regaining their Q4 2019 peak until 2024.
Commenting on the report, Professor Neil Gibson, Chief Economist for EY Ireland said, “A contraction of more than 10% in 2020 would normally be expected to be accompanied by similarly adverse labour market conditions but the scale of government support has, so far, prevented such an outcome. Though job losses are projected later in the year, the unemployment level is not expected to reach the double-digit levels that were feared.”
Growth will be driven by a strong and robust consumer recovery. Stock market and house prices have held up, boosting overall wealth levels and confidence to spend. The Northern Ireland recovery in consumer sectors may run ahead of the Republic of Ireland given the potential for divergence in reopening timetables linked to vaccine rollout, but the two should be similar in pace and magnitude later in the year. EY estimates are that as much as an additional £3.8bn will be in Northern Ireland domestic accounts by summer 2021 than was previously expected to be the case.
Confidence will play a significant role in how much of this is spent when it is safe to do so. Not all savings will flow back immediately, and if the labour market looks uncertain or expectations are for future lockdowns, then there may be a need for the Government to encourage spending through policy measures.
The report looks at the prospect of increasing prices and suggests that there is a very real risk of a period of strong inflation.
A period of high inflation would bring with it further challenges for those on lower incomes. If prices rise in staples such as food or fuel, this could disproportionately affect those who are on lower incomes who are already more likely to have been worse-off due to Covid-19.
Neil Gibson commented, “There are many reasons to be mindful of the prospect of high inflation later in the year. Rising commodity prices, extra costs associated with health guidelines and Brexit allied to high levels of government and consumer spending would usually suggest the environment is ripe for prices to go up. The hope is that this does not trigger a damaging spiral in wages and future prices, but firms and policy makers should be alive to the risk.”
The Government will face difficult choices when it comes to the timing of any reductions in current supports.
Neil added, “The level of Government support has been unprecedented, but entirely warranted given the risks the crisis presented. Tough decisions lie ahead, the government will need to ease off support as early as possible to avoid locking in additional costs and escalated debt levels but if support is retracted too early many firms or individuals may struggle to cope.”
Despite the much-needed clarity brought by the UK-EU Trade and Cooperation Agreement, the issues related to the implications of the Northern Ireland Protocol have yet to be resolved. It is to be hoped that a mutually satisfactory solution is reached at the earliest possible juncture as Northern Ireland has much to gain from the new era of global investment which lies ahead.
Firms are exploring their supply chains to identify points of failure and associated levels of risk. There is a pushback against any one market becoming a dominant player and a drive towards multi-site and multi-nodal location strategies. This presents a great opportunity for economies like Northern Ireland to capitalise on its unique access to both the UK and EU markets when seeking to attract further investment.
Northern Ireland is also well placed to benefit from increased investment in innovation.
Michael Hall, Managing Partner for EY in Northern Ireland commented, “The UK budget set the tone for a policy environment that will be striving to encourage increased levels of business investment. The value of science and R&D has been made very clear over the last year and, looking ahead, Northern Ireland’s strengths in these areas will be critical to the region’s future. The recent establishment of the Independent Fiscal Council for Northern Ireland and the Fiscal Commission to explore tax varying powers, coupled with progress on City Deals and Freeports suggests a new era may fast be approaching where Northern Ireland is able to plot its own unique economic course.”