Room for optimism: Nigel Smyth

CBI Director Nigel Smyth on the outlook for key sectors and initiatives that are benefitting the economy.

You could certainly get depressed reading many of the local commentaries on the current state of the Northern Ireland economy. This is not helped by some of the doomsday talk around the cuts in public expenditure being bandied about and the resulting slash and burn policies expected. Fortunately my own experience in visiting a wide range of companies in recent months points to a less gloomy prognosis albeit that the ‘good old days’ of the last decade are now well and truly buried.

Demand

For many companies demand remains weak, but in most sectors is recovering. Pricing pressures remain intense and margin erosion is widespread. Manufacturing is largely bouncing back, particularly within the engineering sector though partly driven by re-stocking. CBI surveys point to more encouraging signs here in the months ahead, largely driven by export performance. The large and important food sector continues to grow. It provided much needed stability over the last two years and is a sector which Northern Ireland must continue to nurture and ensure we exploit over the coming years.

Other niche sectors, including ICT and health technologies, continue to impress with strong growth prospects and some very encouraging investment and recruitment underway. While relatively small compared to other sectors, the ICT sector has approaching 800 job vacancies available at nijobs.com, more than any other sector. The retail sector is a more difficult one to read with a striking mix of winners and losers. There is no doubt that the boom days in the border regions are over as sterling recovers and the Republic of Ireland starts to address its unsustainable cost base. Overall demand is still holding up, assisted by the 31 per cent of the workforce employed by the public sector. Despite the ‘cuts’ in the public sector, overall public expenditure will be higher this year than last – real cuts are however coming in 2011.

Business services

The business service sector on the other hand is more of a mixed bag. CBI surveys indicate that volumes in consumer oriented services remain flat and below normal with real disposal incomes likely to be constrained due to inflation, wage restraint and increasing taxes. Prospects in this sector are likely to remain weak. Business and professional services have stabilised, albeit at low levels, though some sectors such as those linked to the construction sector continue to suffer. Indeed the construction sector would be an area which gives rise to considerable concern and the boom and bust we have experienced since around 2005 is a key reason why Northern Ireland’s economic recovery is lagging the rest of the UK.

While there is good evidence that the housing market has stabilised, building activity remains subdued. It is now becoming clear the public sector capital programme has peaked. Anecdotal evidence points to significant delays and uncertainty in capital programmes with a sharp drop in capital expenditure expected in the current year and further reductions expected in future years. For this reason many of our successful construction companies are seeking work outside Northern Ireland. A key policy objective must be to protect the capital programme as much as possible.

Our exposure to the Republic of Ireland, which has suffered the worst recession of any country across the globe in the last two years, has impacted on our export performance and reduced jobs for those who used to commute south on a daily or weekly basis. This is also contributing to Northern Ireland’s lagging performance at the moment, but I expect that will reverse over the coming years as the Irish economy picks up momentum.

Growth

Various forecasters are indicating growth of just under 1 per cent this year for Northern Ireland, and just under 2 per cent in 2011.

Unemployment, which has shown some encouraging signs of stabilising during the first half of the year, is likely to remain at elevated levels for some time to come, with an expectation of further rises as the economy struggles to cope with the annual influx of young talent and as public expenditure reduces.

There is a real concern the austerity package which the new UK Government has had to impose to deliver a credible fiscal strategy may put a significant strain on the economy over the coming years. Much will clearly depend on how this is implemented by the Executive.

Recovery

First and foremost, we need to create more confidence in order to encourage companies to invest for the future. The emergency Budget in June was well received from a business perspective providing greater certainty and consistency on corporate taxation, with a number of other positive measures for business. The tight fiscal stance is expected to keep interest rates lower for longer which will also support the recovery.

In Northern Ireland we now need the Executive to provide the necessary leadership as it responds to a sharp reduction in public expenditure over the next four years. How the Executive responds to this challenge is critical.

It should put a brake on unnecessary or excessive costs, including:

• labour costs across the public sector;
• ensuring every pound is well spent by eliminating waste and duplication;
• making greater use of outsourcing to the private and voluntary sectors;
• re-engineering how services are delivered; and
• implementing some modest revenueraising initiatives.

Failure to achieve this will result in a crisis – a crisis of confidence in the Executive and a crisis in the delivery of public service outcomes. Success on the other hand will provide an important boost to confidence and help build a more balanced and successful economy.

The risks do remain substantial and much of our recovery will depend on how external markets recover. Furthermore, a key determinant of our success will be how the commercial banks respond to the pressures that have been piling up on them and the uncertainty regarding new regulations, levies and capital requirements which may be forced their way. The sooner they have clarity on their own positions, the more likely that they will feel confident enough to pass on the benefits to their customers in the shape of easier credit conditions.

Future

We have some key policy documents under development. In the months ahead we expect to see the Regional Economic Strategy, Skills Strategy and Strategic Energy Framework published, key documents which CBI members hope will set out the ambitious vision and supporting strategy and actions for the Northern Ireland economy over the next decade and will help boost confidence.

Current initiatives which support recovery include:

• a reformed further education sector keen to engage and respond to business needs;
• major strengths in our universities and exciting growth opportunities developing within the Northern Ireland Science Park and the wider technology sector;
• significant growth opportunities in our tourism sector with major new assets coming to fruition in 2012;
• an expectation of improved foreign and direct investment performance as global investment rebounds;
• a favourable exchange rate to support our exporters; and
• emerging opportunities in sustainable industries, life sciences and creative industries, as well has higher levels of innovation across our more traditional sectors.

As the voice of business the CBI will continue to provide leadership in influencing the Executive’s decisionmaking to ensure its policies deliver both the jobs and public service outcomes which we all wish to see.