An upward revision in the UK’s gross domestic product for the fourth quarter of 2009 has prompted suggestions the economy is maybe in better shape than we first thought. Angela McGowan, Northern Bank Chief Economist, assesses our current economic health from a local perspective.
So where are we now?
Northern Bank research has shown that the local economy “technically” emerged from recession at the end of 2009. Unfortunately technical recovery refers only to the fact that the economy stopped contracting but masks the fact that local economic output is still nowhere near pre-recession levels.
Enormous levels of UK government intervention have managed to pull the economy back from the brink of disaster. Nonetheless the current recovery is a little uninspiring and policy makers will be treading a tight-rope in terms of balancing the scale and timing when it comes to pulling back their intervention.
Over 2010, the local economy is expected to grow at a mere 1.3% - with quarter 1 proving to be the most turbulent of all quarters. The prolonged cold snap in January will have dented economic activity for local retailers, the hospitality industry and manufacturing - but modest growth is expected during 2010. Downside risks exist but so too do growth opportunities.
Perhaps before we explore potential ups and downs in detail we should consider the phrase used by Shimon Peres, President of the State of Israel, at a World Economic Forum in Davos: “The optimist and the pessimist both die in the end, but each lives his life in a completely different way.”
Global recovery can only be good for the local economy. As world trade recovers, Northern Ireland will benefit from the upsurge in demand and the impact that international growth would have on confidence. The global economy in 2010 is forecast to show a solid rebound. At the time of writing the Internal Monetary Fund’s most recent estimate suggests the world economy will bounce back with 4% this year and 4.3% in 2011. This growth will be led by emerging markets, but advanced economies are expected to drag down the overall recovery curve.
Manufacturing at the global level has been enjoying a good revival as companies restock and receive a boost from rising world trade. But the upturn has been less pronounced in some countries. The UK finally emerged from recession in Q4 last year and, even with the upwardly revised Gross Domestic Product levels (revised up from 0.1% to 0.3% in Q4 2009), worries remain about the country’s ability to sustain this upturn.
The words “double-dip” keep appearing in the media - but I am reluctant to use this term as it suggests that the economy will contract by the same or similar levels as last year and such a scenario is highly unlikely. If the UK output contracts again in the early part of 2010, the dip would be a very small one and should be temporary in nature – perhaps focusing on the medium term is more important as the UK is forecast to experience overall growth of 1 per cent in 2010.
In Euroland, the early part of 2010 has been marred by Greek debt problems and on top of this Spanish debt problems are most probably looming on the horizon. Germany, the Eurozone’s largest economy, is reported to have experienced a stall in its recovery in quarter 4 - although Construction sector sentiment jumped further upwards from 103.2 to 105.9. The strong increase in German construction sector sentiment is a clear indication their housing market is finally about to take off fuelled by the historically low interest rates.
Over the last few weeks economic and consumer sentiment has taken a slightly negative turn. After a strong recovery during 2009, the US consumer confidence index suffered a relatively large set-back falling from 56.5 to 46 in February. Consumer confidence also declined in the Eurozone in February - but only very marginally. However, not all news is bad! Purchasing Managers Index data indicate that the European rebound remains on track despite the disappointing Q4 GDP data. Thus the hope for a strong quarter 1 2010 is still alive. New orders currently signal GDP growth in Euroland of about 2% quarter-on-quarter annualized. Europe’s export engine is still at full speed. This should be enough to get domestic demand on the move and initiate the more sustainable recovery that we are all waiting for. It is essential that a recovery in private demand materialises before fiscal tightening kicks in. Otherwise we are about to see a very slow recovery in Euroland.
Downside risks: the problem with the recovery
Recovery for most advanced economies has initially been feeble – although the UK and US both experienced upward revisions to their latest growth rates. Fragile growth combined with high unemployment levels and weak earnings growth in many of the world’s major economies suggests that the consumer might be shy about taking over the reins of recovery. Nonetheless, national debt levels suggest many governments are looking to pull back on their support as soon as conditions allow. Unfortunately, because of the political nature of fiscal policy, a large degree of uncertainty surrounds the expectation that governments will choose the correct course of action. In the UK, Conservatives aspire to announce cuts in government spending in early summer, while Labour is determined not to put the recovery at risk – an approach which is probably more in tune with recommendations from the IMF and the reputable Institute of Fiscal Studies in the UK. A further downside risk stems from the fact the financial system has not yet been fixed. While financial conditions have improved, problems with financial structures and regulation have still not been resolved.
Reasons for optimism
Of course not all the news is bad. In particular, in Northern Ireland we have some of our own unique reasons for optimism. As the global economy picks up, so too will opportunities for the local economy. Weak sterling continues to provide support for both manufacturing exporters and border retailers.
Also, the housing market has stabilized. In addition, local economic policy in Northern Ireland looks set to be streamlined through one government department - so the potential for quicker and co-ordinated local policy responses is good. Furthermore the corporation tax debate is back on the table - with improved policy structures and a competitive corporation tax in Northern Ireland (and of course depending on how you look at things) the opportunities for economic growth in the longer term could be endless.