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Economic Eye Winter Forecast 2017/18

Executive summary

In this winter 2017/2018 edition of the EY Economic Eye we examine contrasting headline economic growth across the island. We explore why it is happening and if it will continue. The report provides an update on the highly uncertain Brexit journey and an in-depth look at the consumer and retail sector.

Brexit presents the biggest economic and social challenge in living memory in a complex political climate across the island of Ireland. It is essential that long-term prosperity and the common goal of delivering a more successful, fairer and inclusive society in both jurisdictions is not jeopardised. We add our voice to those calling for the restoration of the Executive in Northern Ireland and the need for all governments to work in a spirit of collaboration for mutual benefit.

The headline data suggests an increasing divergence in economic fortunes across the island. The Republic of Ireland sits atop the European growth charts, while Northern Ireland is closer to the bottom. But the headline data does not tell the full story – beneath it the picture is more complex.

Both economies are enjoying strong growth in jobs, property prices and average wage levels, though very different inflation levels are creating a divergence in spending power. Both jurisdictions are increasing the public policy focus on infrastructure needs and sub-regional, inclusive growth.

The consumer and retail sector is undergoing huge change. As one of Ireland's largest, it provides employment for all ages and skill levels, and we ask if it is time to re-think taxation models for retailers and consumption generally.

We reflect on our client experiences over the year and report on the activities and strategies being deployed to meet their challenges.

Across the market, we are seeing that detailed scenario planning for Brexit, accelerated investment in technology and innovative approaches to talent attraction and retention are already underway. Despite the current mood of uncertainty, our client interactions offer reassurance that these challenges can be overcome.

This report is crafted in the eye of a storm of uncertainty and contains certain assumptions about the likely outcomes of the Brexit negotiations. The forecasts are, therefore, uncertain, but the contents are relevant regardless of the precise outcome of the negotiations. We hope the narrative and insights within will add value.

Professor Neil Gibson, Chief Economist, EY Ireland

Michael Hall, Head of Markets, EY Ireland

Economic Outlook: diverging growth across the island

EY Growth Forecasts
2017 2018 2019 2020 2021
UK 1.5% 1.4% 1.8% 2.0% 2.2%
ROI 4.9% 3.4% 3.1% 2.9% 2.8%
NI 1.4% 1.1% 1.6% 1.7% 2.2%

The assumptions underpinning the forecast are for a Brexit transition period which allows for close to ‘business as usual’ over the outlook period. Should this not be the outcome the forecasts would alter accordingly.

At close to 5% in 2017, ROI growth is projected to be among the fastest of the world’s major economies. A healthy labour market and low inflation are boosting the domestic economy and, with governments beginning to spend rather than cut, the economy faces uncertainty from a position of strength.

The Irish Budget was rather measured, which is laudable, but also reflects the concern and, in some places, fear, relating to Brexit. It will cool the economy somewhat, but there’s enough cross-sectional momentum to suggest some resilience to Brexit is building up, though this differs across sectors and locations.

NI growth is projected to be more modest, though a recession is not the central cause. A more challenging consumer environment and the absence of a local government has offset the export improvement that falling exchange rate falls had driven.

The UK is forecast to grow at under 1.5% in 2018. Investment levels remain muted and consumers are currently enduring below inflation level pay increases.

Influences on the components of growth across the island

Consumers

ROI

+ rapid job growth
+ real pay increases
+ positive migration flows
+ confidence
- savings towards property purchase


NI

+ cross border shopping
+ increased employment levels
+ tourism spending
- below inflation pay rises
- confidence impacted by Brexit and real wage falls

Government

ROI

+ increased spending levels
+ improved fiscal position
+ lower levels of social security spend
- high levels of national debt
- fears over Brexit


NI

- no Executive to set budgets and make spending decisions
+ modest increase in budgets plus DUP / Conservative funding from supply agreement
- UK fiscal position remains constrained

Investment

ROI

+ rising prices encouraging commercial and residential investment
+ firms investing in tech and equipment as skills availability impacts
- nervousness relating to Brexit delaying decisions
- price rises making investment less affordable for some

NI

+ inward investment levels still strong and office demand positive
+ hotel investment at high levels
- Brexit concerns holding back investment

Trade

ROI

+ growth in world economy and in particular, US and Europe boosting export demand
- exchange rates driving increased imports
- weaker UK growth and Brexit fears


NI

+ fall in Sterling boosting export competitiveness
+ imports more expensive leading to import substitution potential
- weaker UK growth and Brexit fears

Labour Market

Job growth is positive across the island, with an increase of 12.4% in net employment over the last 5 years, broadly spread across sectors and geographies.

In ROI, skills shortages will come sharply into focus in 2018 and firms will have slim pickings due to skills and locational mismatches in the labour stock. Migration will play a part in filling gaps, but will be held in check by housing shortages and associated price increases, slowing the labour market modestly from its recent growth rate.

The outlook is more challenging for NI where consumers, government and businesses face pressures heading into 2018. The uncertainty over Brexit appears to have had little impact on the job market so far, but the squeeze on real incomes will soon begin to bite.

We expect 144,000 net additional jobs across the island from 2017 to 2020, modestly slower than the 205,000 enjoyed between 2014 and 2017.

EY - Employment forecast: RoI and NI

Sectoral Outlook

Many sectors are undergoing profound change as technology reshapes business models and creates firms that do not fit neatly into a sectoral bucket. Encouragingly, there is a broad sectoral spread in the job outlook, with strong service sector growth complemented by construction and industrial jobs, particularly in ROI.

Construction continues to climb from historically low employment levels, while transport and storage is growing, partly due to disruption in the retail and logistics sectors.

Public sector contraction is projected in NI, and retailing is expected to suffer as real incomes fall. However, tourism and cross-border shopping mitigate these effects somewhat.

Agriculture could be profoundly impacted by Brexit, and is therefore very hard to forecast, but strong global demand and reputation give reasons to be positive despite looming change.

Jobs growth forecast 2017-2020

Sector ROI NI
Agriculture 0.6 0.0
Mining and Quarrying 0.3 -0.1
Manufacturing 14.7 -0.1
Utilities 1.6 0.2
Construction 16.1 1.6
Retail 10.5 -3.0
Transport and Storage 15.4 1.8
Accommodation and Food 7.0 2.2
ICT 13.5 2.4
Finance 7.8 0.3
Real Estate 1.0 0.1
Professional services 9.9 2.0
Admin services 8.0 1.8
Public Admin 5.3 -1.6
Education 9.6 -0.5
Health 11.6 -1.4
Arts 3.2 0.2
Other services 2.6 -0.2
TOTAL 138.5 5.8

Source: EY Economic Eye forecasts