Posted on Wednesday 16 January 2019 by Ulster Business
Professor Neil Gibson, chief economist at EY Ireland says in two decades in the field, predicting the future has never been harder
Forecasting is always a challenge but, in 20 years as a professional economist, I have never had less confidence in predicting the year ahead than I do now. At the time of writing, the nature of the UK’s departure from the EU remains unclear. Estimates of the economic impact of various exit scenarios ranged from 5-8% in a catastrophic exit (by 2023).
Notably, all of the variants suggested a loss of GDP in the UK, though it also worth noting that GDP means virtually nothing to most of the voting public. The prediction of 30% loss in house prices in the disorderly scenario is much more likely to focus minds. Moreover, Brexit is far from the only uncertainty ahead. Trade wars are continuing, oil prices are slumping and stock markets are incredibly volatile. Many of the global warning lights have flicked from green to amber and it is entirely possible that 2019 will be a very challenging year indeed.
Despite the gloomy introduction, the base case forecasts continue to suggest a year of modest growth ahead. EY predicts a small contraction in the local labour market but most other forecasters disagree. This base case projection assumes a transition period is in place and that a global slow-down does not materialise: two rather large assumptions to make. The optimism is partly borne out of what has been a remarkable period of job growth in Northern Ireland. The workforce jobs measure reports 14,000 net additional jobs have been created in the year to Q2 2018.
This continues a trend that started in 2012 and has seen the overall employment level rise by 92,000 since Q1 2012. This is despite very modest levels of recorded GDP growth and, finally, it has taken the region back above the total employment levels reached in 2008. This performance is a credit to businesses throughout the region as, remarkably, all council areas have enjoyed job growth and all sectors outside of public administration have increased their headcounts since Q1 2012.
The consumer is, perhaps, the most intriguing aspect of the economy heading into 2019. Inflation is running very close to UK average salary increases, which means that, on average, people are not getting richer. However, overall consumer spending has been rising – partly because there are more people in work and partly because people have been willing to run down savings or take on debt.
The data shows NI to be particularly vulnerable in this regard, with higher proportions of people without savings (45%). The fragile state of the economy means, probably, that interest rate increases are unlikely, especially with falling oil prices easing inflation, but the impact of a change in consumer sentiment and spending behaviour would trigger a marked slow-down. Consumer confidence measures are inherently volatile but there are reasons to be concerned. Confidence surveys have been edging downwards – the UK credit conditions surveys suggest a tightening amongst lenders in 2019 and savings ratios (the amount people save of their income) are at historic lows. Consumer trends should be watched closely in early 2019 as they will prove critical to overall economic performance.
TRENDS TO WATCH IN 2019
There are a number of economic trends I would expect to see in 2019:
Continued retail transformation: it has been a difficult time on the high street as consumers move increasingly to on-line shopping. A number of high profile closures have taken a toll and we expect this pattern to continue. This will, as all periods of change do, create winners and losers and will place pressure further on an outdated rates system that relies heavily on retailing.
Embracing digital: the potential that new forms of technology presents has been clear for some time. Artificial intelligence, blockchain, software as a service (SAS), data analytics (to name but a few) have long been touted as potential game changers. There has been a marked pick-up over the last 12 months in firms making investments in these areas. Maturing of the technologies and a tighter labour market are factors in these trends and we expect that to continue in 2019.
Pockets of growth: regardless of the wider economic conditions, there will continue to be pockets of very fast growth throughout Northern Ireland. The pipeline of professional services inward investment remains strong, in particular with US firms seeking talent a noticeable trend. Media and film continues to boom and, even on the high street, there is no sign of a slowdown in the proliferation of coffee shops, personal wellbeing businesses and take away outlets.
Volatility: share prices and exchange rates are likely to be incredibly ‘spikey’ given the turbulence in the world economy.
Summary – beating the forecasters?
The Northern Ireland economy’s labour market has surprised me over the past 18 months. I hope that it continues to outperform expectations in 2019. Hopefully, there will be a transition period in place with a clear roadmap to a future free trade agreement between the EU and UK which may prevent the scale of slow-down I worry may be coming. While on the subject of wish-casting, let us hope that the Executive is back and operating too in 2019. If all these pieces fall into place then next year’s outlook for 2020 will be much easier to write.