Posted on Monday 9 September 2013 by Ulster Business
First Minister Peter Robinson and Deputy First Minister Martin McGuinness have visited China twice in the last year. The centre of the world's economic gravity continues to move east.
Any long-term prognosis comes with the usual health warning given the capacity for "economic shocks" and the reality that this region is still dealing with its economic past and a legacy of high debt, the adjustment from which is incomplete.
In a sense, the repair of balance sheets may be seen as the solution rather than the problem, but the work-out period will likely extend for a number of years yet, impacting on the level of aggregate demand in the economy and ensuring the our GVA growth rate stays on a lower trajectory relative to pre-crisis.
The centre of the world's economic gravity continues to move east and, despite the so far patchy recovery in emerging markets, the long-term outlook remains broadly favourable. There are huge pools of educated and skilled labour (though more expensive than before) combined with scope to boost productivity through new technologies and increasing urbanisation. The growth path in these economies will not be in a straight line and there may be a financial crisis or two along the way.
Against such a backdrop, the local economy must continue to "internationalise" and look outwards. Interestingly, while we are trying to rebalance towards exports (and away from domestic consumption), China faces the opposite challenge.
The outlook for the US appears more mixed – the Federal debt and ageing demographic should inevitably act as a drag on long-term growth rates. At some point Washington will have to "suck" demand from the economy to a much greater extent. More positively, advances in shale gas technology should ensure an abundant supply of cheaper fuel, at least in the short-term.
The outlook for Europe seems less encouraging – has the crisis subsided or merely moved into another phase? The ECB's actions have bought time but can weaker states restore competitiveness versus Germany within the monetary union by a de facto internal devaluation? Over the next decade the euro-area will either come closer together in deeper political and fiscal integration or fragment – but the risks of a long period of economic stasis are high.
The vote on Scottish independence, a general election and possibly a referendum on EU membership must be considered.
Whatever the outcomes, there is a risk of a change to the financial arrangements in the UK to the detriment of this region.
On monetary matters, at some point the BoE will have to manage the formidable challenge of unwinding Quantitative Easing (QE) – the volatile response recently to the hint of a withdrawal in the US may indicate how dangerously dependent the financial markets have become on a flow of very cheap liquidity.
In scenario planning, we should attach some probability to the risks of another financial crisis in the UK over the next 5-10 years – a national debt rising towards 85-90% of GDP and the unwinding of QE are potential triggers for disorder in the gilt and currency markets. While "policy" interest rates are almost certain to remain unchanged until 2015-16, market rates may begin to normalise sooner.
The critical conditions for restoring buoyancy to the regional economy have been well rehearsed, notably:
• a widening and diversified export base
• a revival in private investment and public infrastructure
• stabilising the banking system, housing and property markets
• structural reform of public services and reducing the cost of government
• recovery in our neighbouring markets in GB and ROI.
The near-term challenge is to move from stabilisation to recovery. The immediate outlook seems a little brighter for 2013 and 2014 with a modest acceleration in UK GDP.
The overarching goal is sustainable and balanced growth, a task made more difficult by the recession and policy responses which have, in effect, helped widen the imbalances. Despite numerous strategies, the reality is that Northern Ireland is as dependent on government and public spending as ever – the Economic Pact and report by the Food Strategy Board are recent examples. The "growth drivers" in the pre-crisis decade – rapid expansion in both government expenditure and private credit – will carry much less weight, while domestic demand will remain constrained.
Potential growth areas are a mixture of the traditional and the new – agri-food, niche, high value manufacturing, technology, pharma & health sciences, renewables, tourism, creative industries, regulatory & compliance services etc. Furthermore, the rate of house building is likely to accelerate again
Lower growth rates will pose a formidable labour market challenge. In the decade to 2008 the regional economy created c12,000 jobs per annum, largely driven by the retail, construction and public sectors. Post-2008, around 40,000 of these jobs have gone, with the same sectors going into reverse.
Despite welcome job announcements, our labour market has little prospect of returning to the pre-2008 peaks over the next decade. Net job creation is unlikely to absorb the volume of new entrants as the historic labour-intensive sectors remain challenged and others re-size operations in the face of market changes.
In the foreseeable future we will be running hard to stand still. For young people there will be fewer local opportunities compared to the previous generation, a situation that should trigger a re-think of all current policies aimed at the 16-24 year olds. Unemployment and underemployment will remain key issues.
Businesses will continue to face the challenge of adjusting to the "new" financial order and the rapid pace of technological change. Those with strong balance sheets, competitive labour costs and diversified markets will have better prospects.
Businesses no longer relevant or able to deliver for tomorrow's consumer will likely disappear. Others face the threat of increased commoditising of their services.
For Stormont and local government, the task should be to create the most business-friendly environment through affordable energy, planning, regulation, employment law, business rates etc. The opportunity to fundamentally re-shape the public sector through greater participation of the private sector in service provision was not taken during better economic times. And if the ring-fence on health and education is lifted in the next UK spending round, we may not have a choice. Critical decisions on the long-term funding of water, health, social care and infrastructure lie ahead.
The long-term outlook for all stakeholders in the economy remains challenging but we get richer by getting better, not by getting older.
Alan Bridle is UK Economist at the Bank of Ireland.