Subdued economic growth forecast for Northern Ireland underlines case for investment in skills and connectivity

The case for greater investment in skills and connectivity to address the ‘productivity puzzle’ is made in the latest UK Economic Output 2019, which forecasts that Northern Ireland and the rest of the UK will see subdued economic growth next year.

According to the PwC report , Northern Ireland is expected to deliver a below-average performance in 2020 with growth estimated at 0.8%, down from 1.0% in 2019. The UK average is projected to see a similar fall from 1.2% in 2019 to 1.0% in 2020.

UK economic growth has been stagnating, particularly since the financial crisis, despite record low levels of unemployment. As well as the Brexit-related uncertainties and the impact on investment, the UKEO 2019 considers other reasons for this by comparing the UK’s lagging productivity levels with other European and G7 countries, as well as regional differences, to identify solutions. The report shows that UK GDP could be boosted by 4% - or £83 billion - if local areas with below-average productivity levels could make up even half of the gap.

Across the UK, regional productivity gaps are significant with the greatest above-average performance coming from London which is 40% higher, and the South East coming in as the only other region with above average productivity. The lowest is Yorkshire and the Humber where it is 16% below, with NI’s productivity 12.7% adrift. Internationally, UK output per worker is around 10-15% behind Germany, France and Sweden and more than 30% behind the US. 

Productivity in Northern Ireland has lagged behind the rest of the UK for several decades. Statistics from the Office of National Statistics (ONS) show that although the region has had record levels of employment (72.3% in November), in Quarter 2 2019 labour productivity fell by 0.5% compared with the same in the previous year. It followed two consecutive periods of zero growth and there was no growth in output per job during the same period.

The UK Economic Outlook suggests a number of strategies that could be employed to help boost productivity across the regions. Notably, businesses can promote workplace training and upskilling, a recommendation that is reinforced by PwC’s recent global skills survey. It revealed that workers in Northern Ireland were the most open to retraining and upskilling, and two out of three said their employers were providing opportunities to improve their digital skills. In addition, investment in local infrastructure could boost connectivity (and therefore productivity).

Paul Terrington, PwC NI chair and Head of UK Regions, commented:

“At the heart of the case for greater connectivity is the idea of economies of agglomeration. It means that bringing businesses and people together - in a variety of ways - produces opportunities for collaboration, competition and innovation.

“We find, for example, that a 1% increase in skills is associated with a 2% increase in productivity in a local area. Physical connectivity also matters, which reinforces the case for increased investment in transport infrastructure for areas that tend to lag behind. Similarly, investment in high-speed broadband would deliver significant benefits, particularly for rural areas, by offering businesses and the workforce far greater connectivity and flexibility.

“The prize from closing the regional productivity gap could be large. If the areas that are performing below the UK average can close 50% of this gap in productivity performance, it could add around £83 billion to the economy, equivalent to almost 4% of GDP.”

The UK Economic Outlook says that most industry sectors can expect relatively modest growth in 2019-20, though short-term trends remain dependent on how events develop around Brexit. The distribution, hotels and restaurants sector remained strong in the first half of 2019, but a slowdown is expected next year, whereas the weakened business services and finance sector could enjoy a modest recovery in 2020 assuming an orderly Brexit can be achieved. The manufacturing and construction sectors have experienced considerable volatility in recent years and are unlikely to see sustained recovery until there is clarity on both Brexit and the global trade outlook.

John Hawksworth, chief economist at PwC, commented:

“UK economic growth is likely to remain choppy throughout the rest of this year and in early 2020 . However, there could be a modest bounce in business investment later in 2020 if the UK achieves an orderly Brexit, but the uncertain global economic outlook could hold back a stronger recovery in investment next year.

“Any potential weakness in private sector spending in 2020 should be offset at least in part by stronger trends in government spending. Both major political parties have shifted away from austerity, which is likely to support growth in 2020, irrespective of the outcome of the forthcoming general election. But this will also leave a bigger budget deficit to deal with in the longer term.”

 

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