Business and politicians should assume that “Brexit means Brexit” and develop bold strategies to internationalise the local economy, according to the latest Northern Ireland Economic Outlook (NIEO) from PwC.
PwC says that assuming the UK will enjoy continued unrestricted access to the Single Market, or that Westminster will maintain current levels of EU financial support, post 2020, could lead organisations and even complete sectors to become complacent about their future competitiveness.
The latest NIEO forecasts that the deceleration in Northern Ireland’s economic recovery, which has been evident over the past year, will continue, but that outright recession is now unlikely. However, despite recent positive economic news for the UK as a whole, the report says that local output remains around 7% below the pre-recession peak in 2008 and that the region is not generating the productivity gains that will create wealth and increase wages and household disposable incomes.
PwC also says that, the pace of recovery is threatened by a combination of global slowdown and post-referendum uncertainty. The region’s economic growth slowed from 2.2% in 2014 to 1.5% in 2015. PwC says Northern Ireland can expect growth of only around 1.2% in 2016 and that could fall to as low as 0.3% in 2017, in response to the Prime Minister invoking Article 50, which starts the clock on the UK’s EU exit process.
Commenting on the options, Dr Esmond Birnie, PwC chief economist in Northern Ireland, said:
“Theresa May said that “Brexit means Brexit” and business, politicians and others should work on the principle that this is inevitable and focus on developing radical options for growth and international competitiveness.
“The outcome of Brexit is more likely to be favourable if the Executive can clearly identify its key priorities for a post-Brexit world and lobby vigorously for these to be included within the UK’s negotiating position. It would also be a mistake if this process automatically assumed continued, unfettered Single Market access.
“Merely negotiating for new signatures on the traditional cheques to fund the status quo and assuming that HM Government will simply replace all current EU funding streams, will not close the existing prosperity gap with the rest of the UK, let alone rebalance the economy, drive up productivity and restore wages and household incomes.”
The latest PwC Recovery Dashboard, shows that total employment has now passed the previous June 2008, pre-recession peak. Service-sector jobs now account for around 82% of all local employment - 17,600 more than in June 2008, but construction employment is still 16,700 below its pre-recession peak of December 2007.
However, although overall job numbers are now ahead of the pre-recession peak; in real terms, average gross weekly earnings are still £23/week lower than in 2009, with real disposable household income around £1,800 less than in 2007
NI Recovery Measures: 100%= pre-crisis level
PwC says that the recovery indicators illustrate a story of jobs growth without any comparable gain in productivity or wealth creation; consequently it is misleading and even dangerous to focus on employment as the yardstick for recovery and a proxy for prosperity. The report says that, despite the increase in total employment numbers, this seemingly larger workforce is actually working fewer hours per head than were worked pre-recession and this is a key factor in holding down productivity and wages.
Of PwC’s ten key recovery dashboard indicators - ranging from wages and disposable income to sectoral employment- only service sector jobs have recovered to their pre-2008 or pre-crisis level, further demonstrating that employment growth is not impacting on stubbornly low productivity, which remains below pre-recession levels.
Northern Ireland Recovery Dashboard
Addressing this productivity gap is essential to rebalancing the economy and is the key to recovery and prosperity, in a post-Brexit world, the NIEO says.
PwC chief economist, Dr Esmond Birnie says improving productivity, potentially in the context of Northern Ireland without access to the Single Market, will be a vital component in the new Programme for Government (PfG):
“Low productivity translates into reduced business profitability, low wages, and falling household disposable incomes, which in real terms, are now around, £1,800 (11%) below the amount the average Northern Ireland family enjoyed in 2007.
“Closing this productivity gap would be challenging under normal circumstances, but with the UK committed to leave the EU, those challenges will be amplified. It is therefore essential that the particular needs of the region are included in the UK’s overall negotiating position as it plans the country’s post-Brexit future.”
Looking to some of the key sectoral issues that will be impacted by the UK leaving the EU, the NIEO warns that the status-quo is unlikely to be sustained.
In terms of manufacturing, the NIEO says 55% of Northern Ireland exports go to EU markets, as compared to 48% of all UK manufacturing exports, with the Republic of Ireland the region’s single biggest manufacturing export destination. Striving to maintain both trading relations and an open border with the Republic should be a priority.
The region’s food processing exports have grown rapidly since 2008 and are also highly dependent on EU markets - and particularly on RoI. With EU external tariffs on some dairy products as high as 35%, a focus on developing the UK market (where 27% of food is imported from the EU) and securing access, non-EU markets is vital.
The Northern Ireland’s and RoI farming (producer) sector is vulnerable to Irish processors turning to EU producers when Article 50 is invoked, fearing that Northern Ireland products will lose their EU origin status. With about 30,000 farms in NI, replacing existing EU farm subsidies with UK government support is politically questionable as, relative to output, the rate of support in NI is about three times that in England. Exploiting natural advantages like grass-based farming, traceability and R&D offer more scope, while New Zealand has managed the transition to a low subsidy producer sector with its share of GDP at about 5% several times higher than it is in NI.
The business services sector has grown rapidly and if single market access is lost this will be less significant for business services than for manufacturing. With much of the sector focused on back-office activities the current position should not suffer, post-Brexit, although the attractiveness of a Northern Ireland as an investment location for business may diminish as the UK exits the EU. Corporation Tax at 12.5% will be helpful, but if the overall UK rate also falls, that advantage will be diluted.
Email: Esmond Birnie
Tel: +44 (0)28 9041 5808
Email: John Compton
Tel: +44 (0)28 9041 5663