Posted on Tuesday 23 August 2011 byUlster Business
Economist Maureen O'Reilly finds a wealth of evidence to prove that the speed at which the Republic of Ireland gets back on its feet will have a huge influence on Northern Ireland's economy.
As recessions and recoveries go this one is certainly protracted.
A recent IMF review found that those associated with financial crises did tend to be more severe and long lasting than those associated with other shocks. Northern Ireland is even more exposed to the extent that small businesses (which make up most of the business population here) are particularly sensitive to changes in financial conditions. This makes the challenge to recovery here all the more difficult. In 2009 Northern Ireland experienced possibly the largest calendar decline in output since post the First World War depression. While eighteen months have passed since the UK "officially" came out of its longest recorded recession, many of the key economic surveys and statistics show few signs of recovery here.
In fact, it would appear that Northern Ireland is becoming even more disconnected from the wider UK economy. In a recent survey of 500 local Chartered Accountants representing businesses ranging from sole traders to multinationals, around four in every five believed that the Northern Ireland economy was still firmly in recession and performing worse than the UK as a whole. This is dispiriting given that, regardless of the economic climate, Northern Ireland typically ranks around the bottom three performing UK regions (out of 12) across most economic indicators.
One of the key reasons attributed to the growing divergence between Northern Ireland and the UK is Northern Ireland's unique exposure to the near collapse of the Republic of Ireland economy. The UK is already one, if not the, most exposed countries in relation to Irish debt. However, the two economies on this Island are so inextricably linked in some areas that the knock on effect of Ireland's recession has and continues to have considerable implications for the Northern Ireland economy as a whole.
Ireland is Northern Ireland's second largest trading partner after Great Britain accounting for almost 30 per cent of manufacturing exports or £1.5bn. It is in fact the largest trading partner for small local manufacturers here. Almost 30 per cent of sales (£63m) from Northern Ireland's more export orientated services are sold to Ireland.
Around one third of foreign owned businesses (250 firms) operating here are Irish-owned and between 2002/03 and 2009/10 some 10 per cent of planned foreign direct investment in Northern Ireland originated from Ireland. Irish visitors/tourists staying in Northern Ireland spent an estimated £66m in 2009. During 2009/10 Irish shoppers, driven by the strong euro, spent an estimated €400m here.
When you begin to aggregate these figures you start to get a sense of just how important Ireland's economy is to our own even though its population is only two and a half times larger. This does not even begin to touch on other key sectors, particularly agriculture, where strong trade links also exist.
The Irish recession has taken its toll across a number of these areas. During 2009/10 Northern Ireland manufacturing exports to Ireland fell by £99m or 6.3 per cent. Small local manufacturers were particularly badly affected. Driving this decline were sectors such as fabricated metal products (down 62 per cent) and the manufacture of concrete/cement/ glass and wooden products, all with links to the construction industry.
Unfortunately, a very strong performance by our local food sector in Ireland was not sufficient to counter the decline experienced by these sectors combined. Northern Ireland also sold fewer services to Ireland during 2008 and 2009 (down by almost £4.5m or 6.3 per cent), not surprising given the importance of architecture and engineering services to overall services trade with Ireland.
The profile of Irish-owned firms located in Northern Ireland adds another interesting dimension to this. Around one third of Irish manufacturers with plants here are in what could be considered construction related sectors including ready-mix concrete and concrete products. All of these sectors have been significantly exposed to the collapse in the construction industry on both sides of the border.
The very serious adjustment in the construction and property sectors in Northern Ireland has been well documented. Many of the job losses in construction here can be linked to the complete disintegration of the Irish construction industry. Much of Northern Ireland's property "bubble" had its origins in the Irish Banking crisis and easy access to debt finance. The estimated £3.35bn transfer of Northern Ireland land/property to NAMA is testament to the sheer scale of the problem. Northern Ireland will also have to take its share of jobs losses as part of a planned reorganisation of the Irish banking system.
Tourism has also suffered badly with visitor numbers by Irish residents to Northern Ireland falling by an estimated 25 per cent during 2010 with an associated fall in spend of £22m or 33 per cent. Consumer spending is expected to remain very subdued in Ireland over the coming year which one would expect will further impact on both tourism and cross-border shopping (currency movements aside).
Northern Ireland is already facing budget cuts on a scale never experienced before. It may also have to deal with fallout from the even harsher cuts introduced in Ireland. Local firms have been relatively successful in winning public procurement contracts in Ireland. However, the Irish government is coming under increasing pressure to concentrate spending exclusively within its own jurisdiction. The withdrawal or postponement of funding by the Irish government for the proposed Narrow Water Bridge project connecting County Down to County Louth is perhaps a recent illustration of this.
Back in April 2008, the then Irish Finance Minister Brian Cowen and Stormont Finance Minister Peter Robinson made a joint announcement enabling firms operating in the International Financial Services Centre (IFSC) in Ireland to establish offices in Northern Ireland. Described as a "win-win" situation, this would help cope with the then skills deficit in the South, IFSC firms would continue to qualify for Irish tax incentives while Northern Ireland would benefit from potentially thousands of very well paid jobs. Unfortunately it could not have come at a worse time as the global recession firmly took hold. Northern Ireland has therefore gained little from this announcement to date. It may now however take some share of the 10,000 net new jobs which the Irish government plans to create over the next five years through its recently launched IFSC Strategy 2011-2016.
Uncertainty still prevails around recovery in both economies. Almost all Members recently surveyed by Chartered Accountants Ulster Society only saw Northern Ireland recovering from Spring/Summer 2012 onwards. In fact, around one third believe that it will be some time after 2012 before Northern Ireland returns to positive economic growth.
Chartered Accountants Ireland's latest Business Survey also points to a continued sluggishness in recovery for the Irish economy. More than half of the businesses they surveyed now believe that the Irish downturn will persist for at least another two years.
What is certain is that both economies are still in for a bumpy ride.
Maureen O'Reilly is an independent economist. She previously worked with the Economic Research Institute of Northern Ireland (ERINI) and the Northern Ireland Economic Research Centre (NIERC). Maureen be contacted at email@example.com or on 07917 543870.