There has been no shortage of drama on the economic and political fronts during recent weeks. And the drama is focussed on shortages.
Breaking bad
Cost of living squeeze to trump skills squeeze?
Northern Ireland’s labour market has truly weathered its biggest economic storm to date. Eighteen months ago job losses and a surge in unemployment (above 10%) were viewed as a ‘slam dunk’ outcome. Not so. Fortunately unprecedented actions by the UK government, not least the introduction of the Job Retention Scheme, prevented a pandemic turning into an economic depression. The Job Retention Scheme served the economy well by retaining jobs during the lockdowns and throughout the worst stages of the pandemic. Following a vaccine rollout and a lifting of restrictions, the so-called furlough scheme expired on 30 September. As of the 31 August, the latest data available, there were still 29,700 jobs on furlough with a 50:50 split between full and partial furlough.
For those individuals still on furlough last month, the prospects of finding a job, albeit not necessarily the exact or ideal job sought, couldn’t be better. In 2020 labour market concerns focussed on the potential for massive job losses. Fast forward to autumn 2021 and the unemployment rate, currently 4.1%, isn’t and won’t be a cause for concern. Similarly, Northern Ireland’s payrolls data (excludes self-employed) returned to pre-pandemic levels in June 2021 with record employment levels in each of the last four months to September 2021. Granted this figure is flattered by the 29,700 individuals on furlough. It remains to be seen what proportion of these migrate to employment, unemployment and economic inactivity in due course. Nevertheless, Northern Ireland has experienced the largest payroll growth, relative to pre-pandemic levels, of all the UK regions. However, Northern Ireland has also experienced the steepest fall in self-employment (-31%) within the UK.
For those individuals still on furlough last month, the prospects of finding a job, albeit not necessarily the exact or ideal job sought, couldn’t be better. In 2020 labour market concerns focussed on the potential for massive job losses. Fast forward to autumn 2021 and the unemployment rate, currently 4.1%, isn’t and won’t be a cause for concern. Similarly, Northern Ireland’s payrolls data (excludes self-employed) returned to pre-pandemic levels in June 2021 with record employment levels in each of the last four months to September 2021. Granted this figure is flattered by the 29,700 individuals on furlough. It remains to be seen what proportion of these migrate to employment, unemployment and economic inactivity in due course. Nevertheless, Northern Ireland has experienced the largest payroll growth, relative to pre-pandemic levels, of all the UK regions. However, Northern Ireland has also experienced the steepest fall in self-employment (-31%) within the UK.
You may recall that after the Global Financial Crisis unemployment didn’t rise as high as initially anticipated. That was because pay restraint and falling real wages (i.e. wage increases below the rate of inflation) did the heavy lifting in the labour market adjustment. If pay hadn’t fallen unemployment would have been even higher. There was a sustained period from 2011 – 2014 when UK inflation exceeded average earnings growth which squeezed household incomes. From 2015 onwards the incomes squeeze receded and eventually reversed with real earnings rising again (i.e. wage growth exceeding inflation). Those on the lowest earnings have benefited significantly from the substantial increases in the National Minimum Wage.
We are now back in that same place with the ‘cost of living crisis’ phrase appearing with increasing regularity. Inflation (UK CPI) looks set to exceed 4% in the coming months and could well test the 5.2% peak that occurred September 2008 next Spring. While skills shortages in some sectors (e.g. HGV drivers) are experiencing inflation busting pay rises that is not the norm. With the average pay packet likely to rise by 2-3% over the next 12 months or so that will fail to keep up with inflation. As a result, real incomes and the purchasing power of the pound in your pocket will fall.
As in the last cost of living crisis that started a decade ago, Northern Ireland will be more exposed than other UK regions due to its higher concentration of low paid jobs. Higher inflation is not the only headwind facing households and local businesses. Next April will see the planned hike in National Insurance Contributions come into effect. The combined inflationary and tax squeeze will impact consumer spending and those sectors reliant on it.
Recessions in the 1970s and 1980s focussed on the unemployment rate as the key metric determining how painful economic conditions were. Simply having a job invariably provided a guarantee against poverty. But as we saw in the last cost of living crisis, having a job doesn’t necessarily protect a household from poverty. Despite unemployment remaining at historically low levels, in work poverty is expected to rise in the months ahead. For many, an increasing share of the pandemic savings may now be required for utility bills rather than to assist a consumer led recovery. Rates of pay and inflation will be the most closely watched statistics over the next 6 months or so. Whereas focussing solely on the unemployment rate is so last year.
Chief Economist’s Weekly Briefing – Bumpy Road
Surging energy costs, supply chain disruptions and labour shortages remain high up the agenda. A higher and longer version of “transitory” inflation looks to be here. Cue the inevitable squeeze on disposable incomes.
New orders decline for first time in six months
Today sees the release of September data from the Ulster Bank Northern Ireland PMI®. The latest report – produced for Ulster Bank by IHS Markit – indicated that companies in Northern Ireland continued to expand their business activity, despite a first reduction in new orders for six months. Meanwhile, both input costs and selling prices increased at the sharpest rates on record.
Chief Economist’s Weekly Briefing – Fragile
The revision to Q2 GDP indicated that the economy is closer to its pre-pandemic level of output than previously thought. So, while the list of challenges to the recovery mounts – labour, fuel and components shortages, high inflation, soaring energy prices and rising taxes – at least we know the economy faces them with good momentum.
Recovery summit in sight but is it a false peak?
Two weeks ago NISRA’s Index of Services and Industrial Production surveys for Q2 2021 revealed that economic output was closing in fast on its pre-pandemic level. For example, manufacturing output was less than 1% below the pre-pandemic level of Q4 2019 while private sector services was just over 1% below the same benchmark. Today we got a more complete picture with the release of the Northern Ireland Composite Economic Index (NICEI) and the Index of Construction for the second quarter.
Ulster Economix Podcast Episode 11: Breaking Bad – September 2021
The podcast that keeps you up to date with what is happening economy-wise in Northern Ireland. Telling you what you need to know but not necessarily what you want to hear. It is better to be prepared for the economic environment we are operating in and not the world we would like to be in.
There has been no shortage of drama on the economic and political fronts during September. And the drama is focussed on shortages.
A number of crises, that have been the subject of previous podcasts, are converging. These include supply chain disruption, inflationary pressures and adapting to Brexit. Shortages are becoming ever more problematic from labour to energy.
We have had supply chain disruption intensify most recently with petrol shortages. Some headlines ran with Kung Fuel Fighting as skirmishes broke out in GB petrol station forecourts like something out of a Mad Max movie.
So far NI’s sea-border has prevented any cross-contamination here! Labour shortages, notably amongst HGV drivers, are becoming a major problem and we may see the army called in to assist with the driver shortage affecting petrol stations. Strains in the logistics industry coupled with labour shortages in the food processing industry means this Christmas could be one to remember for all the wrong reasons. Warnings of food and toy shortages have been flagged. Remember these challenges are being overlaid on the new regulatory world that is evolving post-Brexit. The reality is the much lauded Just in Time supply chain is Just not Resilient.
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Chief Economist’s Weekly Briefing – Slowing
The Monetary Policy Committee kept official interest rates unchanged last week, as expected. The big determinant of when they do move will be the the labour market reaction to the end of the furlough scheme. In the meantime, soaring energy prices, rising inflation and worker shortages are continuing. The challenges to the recovery are mounting. But adults in Northern Ireland will have £100 from the High Street Voucher Scheme to soften the blow.
Chief Economist’s Weekly Briefing – Boiling
UK inflation jumped to 3.2% while the pace of US consumer prices cooled off slightly in July. The UK’s recovery stalled in July as the Delta variant roamed. Meanwhile, job creation remained strong in August as the end of furlough approaches. The future direction of the recovery remains unclear and soaring inflation puts pressure on the Bank of England’s response (which insists that rising inflation will be transitory). Interesting to see Governor Bailey’s response this week and what they intend to do to tame inflation.
Finishing line in sight…or is it?
When measuring performance it is important to know what success looks like. It is also necessary to have suitable benchmarks to measure progress along the way. As far as the economic recovery is concerned, getting back to pre-pandemic levels of output, activity and employment satisfies both these criteria. Earlier this week we saw that the number of employees on Northern Ireland payrolls hit a record high for the third month running having eclipsed pre-pandemic levels of employment back in June. On the face of it this looks like mission accomplished until you consider that this is flattered by furlough with 36,100 on the Job Retention Scheme as of the 31 July 2021. Furthermore, focussing on only one measure of labour market success can ignore huge failures in other areas – e.g. self-employment is down over one-quarter from its pre-COVID-19 levels.
So what about output? How is it faring?
It is perhaps worth rewinding back to what the output figures were showing over the last year or so.
2020 was a year of extremes. Record rates of decline in Q2 followed by record rates of expansion in Q3. Lockdown restrictions had the effect of turning economic activity off and on. But as the pandemic progressed, subsequent lockdowns have been less severe on economic activity than the first. Many businesses have been able to adapt and function throughout lockdowns or pivot into new markets. All sectors with the exception of construction saw steeper peak-to-trough declines in this recession than the one that followed the Global Financial Crisis (GFC). The trajectory of economic output has largely followed a bungee jump. The initial fall and rebound being the most extreme, but subsequent declines and rebounds will moderate. For example, Northern Ireland’s private sector output fell by only 2.3% q/q in Q1 2021 – a period of lockdown – which compared favourably with the massive 19.5% quarterly contraction in Q2 2020 (Lockdown 1.0).
