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The Interview: Northern Ireland - the bridge location between the UK and EU

16th November, 2018

MarketWatch sat down with Neil Gibson, Chief Economist of EY Ireland to hear his views about the outlook for the Northern Irish economy and the challenge of Brexit.

MarketWatch: How would you describe the current state of the Northern Ireland economy?

Neil Gibson: Steady, with a surprisingly strong labour market. This appears at odds with the growth figures. Estimates of headline growth for Northern Ireland are generally close to 1% in 2018, with our own EY models towards the upper end of expectations at 1.3%. The labour market has been remarkably strong, despite the poor levels of growth. Employment has hit record highs and unemployment fallen as low as 3.1%, though it has begun to pick up slightly.

Much is made of the region’s poor productivity performance but this is not easy to spot on a visit to Northern Ireland. Hotels are opening, coffee shops bustling and cranes dot the Belfast skyline. People are fairly calm about the 600-day hiatus in the devolved government and the looming uncertainty of Brexit because of the availability of jobs.

Brexit aside, I continue to have concerns that the UK’s consumer dependence will begin to bite and 2019 could be a very challenging year for Northern Ireland, possibly even recessionary. However, the strength of the neighbouring Irish economy and hopes for a smooth Brexit mean that the central case is for the steady, albeit rather underwhelming, performance to continue.

MW: The headline growth is much slower than in the Republic of Ireland. Why is there such a divergence?

NG: Interestingly, the significant growth differential is not as immediately apparent when working across the two economies. Dublin’s very strong performance is evident but, elsewhere, the divergence in performance is less pronounced. Many locations throughout Ireland are exhibiting similar traits, job growth and employers dealing with skills shortages.

The data shows that Ireland is enjoying growth due to strength in each of the main economic drivers - increased government spending, bullish consumer spending, favourable trade conditions and accelerating levels of business investment. In Northern Ireland, each of these drivers is more modest. Higher inflation is keeping pace with wage increases and constraining consumer spending, government spending is effectively flat and investment remains stubbornly low. Only trade offers any upside, helped by weaker sterling boosting exports and slowing consumer imports.

MW: How much of an impact is Brexit having?

NG: There is no doubt that Brexit is on managements’ minds and therefore impacting behaviour but, surprisingly it is rarely the top issue when we talk to clients. Certainly, as March 2019 approaches and the longer the prospect of a no-deal remains, the more anxious everyone will become. However, it is the immediate skills shortage that is pushing Brexit down the priority list.

There is no scarcity of commentary on what the Brexit outcome might be and many clients express frustration at the endless statements about potential losses and problems that the region might face. Investment levels, which were already low, are not improving against such an uncertain backdrop, but firms continue to hire staff, which suggests that demand remains solid. To date, there has been limited evidence of activity transferring out of the region in advance of March 2019. A more pragmatic approach is common, with firms preferring to ensure a presence across both jurisdictions.

MW: You mentioned that the labour market is strong. Why are so many firms hiring if growth is so slow?

NG: This has been a puzzle for a number of years. Assuming the data is not revised, there are a number of possibilities. Firstly, labour cost inflation is low and salaries are very competitive in Northern Ireland, so firms may be eschewing investment in capital in favour of hiring staff. Secondly, the care industry and tourism, which have relatively low productivity, have been growing. Both these factors damage the already weak aggregate productivity level but are hardly reasons to be disappointed.

The boost to manufacturers from the fall in currency has been another reason for job growth. In fact, the 8% growth in workforce jobs in industry over the last five years is impressive and compares favourably to the equivalent figure in the UK (6%).

Although overall growth levels are poor, the possibility that the data is incorrect and that Northern Ireland’s performance is stronger and more reflective of the labour market trend cannot be discounted. We continue to hire in Northern Ireland, as do most firms in our sector, reflecting strong demand and a competitive salary proposition.

Inward investment levels appear lower but announcements continue. The digital, financial and professional services sectors are leading the way due to the importance of available labour and costs, compared to tariff-free European market access. Our EY forecasts suggest that the labour market will weaken in late 2018 and 2019 and overall job numbers will fall. However, this reversal in fortunes was predicted in late 2017 and did not happen. With average pay settlements at best on par with inflation the consumer sectors are facing continued pressure. As long as overall employment is rising and tourism and cross-border shopping provide a boost, the sector may avoid the losses predicted in the base forecast.

MW: Are there reasons for optimism when looking past the Brexit process?

NG: There are plenty. The cost of living and quality of life in Northern Ireland remains favourable, coupled with the cost and quality of healthcare and schooling. There are possible Brexit outcomes that could see Northern Ireland develop into a ‘bridge location’ for firms wishing to serve both European and UK markets. Even in a less favourable Brexit outcome there will be some winners as a weaker currency may boost export competitiveness, particularly relative to other firms currently selling into the UK.

The lack of a Northern Ireland Executive and the disruptive nature of Brexit remain critical risks, but corporates cannot control either of these. So many try to prepare as best they can and look for ways to find new opportunities in even the most challenging of situations. When I talk to clients I am regularly asked not to focus solely on Brexit. Business leaders are looking for a fuller assessment of risk. Hopefully they can continue to exceed expectations and avoid the very challenging 2019 that many economists, myself included, fear.

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