Chief Economist’s Weekly Brief Pick-me-up

January is usually the time for a bit of restraint after the festive period’s excesses. For people in the UK it might last beyond January given the ongoing squeeze on incomes. But if you’re looking for better news on this Blue Monday you’ll find it in UK manufacturing performance, company profitability and global growth.

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December sees strongest rise in output for a year

Today sees the release of December data from the Ulster Bank Northern Ireland PMI®. The latest report – produced for Ulster Bank by IHS Markit – signalled faster rises in output and new orders at the end of 2017. The marked expansion in new orders resulted in a build-up of backlogs of work and stronger job creation. Rates of both input cost and output price inflation remained elevated, despite easing from November.

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Northern Ireland’s private sector ended 2017 on a high. That’s according to Ulster Bank’s latest PMI survey for December. Private sector output and export orders both recorded their fastest rates of growth in a year. Meanwhile order books as a whole – i.e. UK demand alongside exports – expanded at their fastest rate in forty months. The latter bodes well for further growth in business activity and employment opportunities in 2018. Local firms, most notably manufacturers, are benefiting from a pick-up in the global economy and the enhanced price-competitiveness resulting from sterling’s weakness. Retailers have also been benefiting from the exchange rate via increased cross-border trade. Despite robust demand though, it is interesting to note that retail was the only sector not to report increased staffing levels in the latest survey. Arguably this reflects a degree of nervousness with regard to the expected squeeze on consumer spending. Construction, on the other hand, reported the fastest rates of job creation and business activity accelerated to a 22-month high. Meanwhile, services saw new orders rise at the fastest rate in 21-months, though the rate of job creation in the sector eased slightly.

Looking at last year’s business performance as a whole – output, orders and employment growth increased in 2017 at their fastest rate in three years. Export orders matched 2016’s growth rate which was a 12-year high. Inflationary pressures continued to pose a challenge for firms with input cost inflation hitting a six-year high in 2017. As a result, firms raised the prices of their goods and services at a record rate last year. In terms of the sectoral performance, firms in the construction, services and manufacturing sectors reported their fastest rate of growth in output in three years in 2017. Retailers reported the fastest rate of growth in 2017 since the survey began.

Whilst the PMI shows the Northern Ireland private sector moving into 2018 on a relatively strong footing, the same cannot be said for the public and third sectors, with government cuts impacting significantly on both. Furthermore, the private sector faces a number of challenges in 2018 at both a local and global level. With regard to the former, the cost of living squeeze, alongside what happens with Brexit, will be to the forefront of many business owners’ minds. At a global level, the fact that politics remain unpredictable, including in the US, the Middle East and North Korea, could act to dampen the strong economic growth that we have seen.

The main findings of the December survey were as follows:

The headline seasonally adjusted Business Activity Index ended 2017 with its highest reading of the year, posting 56.9 in December from 54.3 in November. The sharp expansion in output was faster than the UK average. There were some reports that promotional activity had helped companies to secure new work, thereby boosting activity. The rate of expansion in new orders accelerated to a 40-month high in December, with new business up substantially. New export orders also rose at a faster pace as sterling weakness helped firms to secure new business from the Republic of Ireland. The increase in new business from abroad was the strongest recorded in 2017.

New order growth led to another monthly rise in outstanding business, the sixth in as many months. Moreover, the rate of accumulation was the strongest since May 2014. Rising workloads encouraged companies to increase their staffing levels, and at a faster pace.

Input prices continued to increase sharply, albeit at a slower rate than in November. Currency weakness remained a key factor leading input prices to rise, while higher costs for staff and raw materials were also mentioned. Output price inflation was recorded again at the end of the year as companies reacted to higher cost burdens. Optimism among companies in Northern Ireland strengthened to a three-month high as close to 35% of respondents predicted an increase in output over the coming year.

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Shrinking third sector a potential significant concern for NI economy

The latest Ulster Bank and CO3 3rd Sector Index is out today and it suggests that Northern Ireland’s third sector will shrink over the next three years.

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The index shows that most third sector leaders (57%) expect the sector to shrink over the next three years, as funding and other pressures continue to impact on it.

The Ulster Bank and CO3 3rd Sector Index is a barometer of Northern Ireland’s third sector, involving a quarterly survey of CO3 members who include the leaders of some of Northern Ireland’s largest charities and social enterprises. Services they provide range from care, to counselling and support, and training and development.

The latest index also points to significant concern within the sector about the environment that they are operating in. More than 75% of leaders say that the lack of a Northern Ireland Executive is impacting negatively on their organisation due to resulting funding issues, a lack of decision-making, and uncertainty.

73% of those surveyed expect the political situation in Northern Ireland to become less stable in the year ahead, and 66% expect the economy to deteriorate. In addition, 80% believe that the recent UK Budget didn’t offer any recognition and support for the work of charities and social enterprises.

The third sector is going through significant change as the funding landscape is transformed. This will inevitably mean some restructuring, consolidation and a potential refocusing of services. But with demand for some of the services that the third sector provides rising, what we don’t want to see is a reduced capacity to deliver the kind of key services that society and the economy needs more and more.

With pressures in the public sector and significant spending cuts, the third sector can potentially provide a cost-effective solution. The onus is on the sector to restructure in an effective way. But there is also an onus on government to ensure sustainable funding for organisations that deliver badly needed services.

As Nora Smith, Chief Executive of CO3, says: “The political and economic outlook for the 3rd Sector in 2018 is a challenging one, with the political deficit a key issue for our members, including a lack of confidence in the Brexit talks and how Northern Ireland is being represented in them”.

“Despite a challenging and unpredictable environment, the sector continues to focus on delivering value to society. Indeed, a small number of organisations are even experiencing an increase in their funding, and overall demand for services provided by the 3rd sector is rising. This highlights the need for and important role of our sector in society.  The 3rd sector plays a significant role in driving forward and leading social change, as well as adding to economic growth in our region, and it is worrying that such a high proportion of respondents expect a reduction in the overall size of the sector within the next three years.”

John McMullan, CEO, Bryson Group, commented: “We in Bryson Care, have certainly experienced an increasing demand for our domiciliary care services, driven by the growing needs of our aging population (currently 15% of the Northern Ireland population is over 65 and projected to rise to 20% in the next decade).  However, the domiciliary care market is in crisis as a result of a disillusioned and reducing workforce.  Urgent political and funding decisions regarding rebuilding this sector and workforce are critical if demand and need are to be met and much needed job creation is to be achieved.”

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Rising inequality on our roads?

Sales of new cars in Northern Ireland fell last year by the steepest amount in six years.  The 5.2% decrease followed broadly flat sales in 2015 and 2016. Showrooms’ sales volumes are now 21% below where they were a decade ago.

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What lies beneath? – The falling overall market conceals diverging performance at a brand level. Indeed, sales of premium brand cars (Audi, BMW, Jaguar, Land Rover, Lexus, Mercedes Benz, Porsche & Volvo) hit a record high of close to 10,700 vehicles.  This represents the sixth successive annual rise in premium car sales, albeit the weakest rise (+1.5% y/y) in the sequence. The premium market now accounts for 1 in 5 of all new cars sold in Northern Ireland (UK = 28%). Conversely, sales of non-premium brands saw the pace of decline accelerate last year by almost 7% to a five-year low.

Premier league 2017 was a record year for Audi (+4% y/y), Land Rover (+4% y/y), Mercedes Benz (+6% y/y) and Volvo (+1% y/y). Porsche saw sales rise 4% y/y to 228 new cars – just ten fewer than 2007’s peak. Jaguar posted its best sales figures since 2004.  BMW (-4% y/y) and Lexus (-9% y/y) were the only two premium brands to experience falling sales volumes last year.

Battle of the brands – Since Northern Ireland new car sales hit their post-recession low in 2011 the premium and non-premium brands have experienced vastly different recoveries. Overall sales in 2017 were 15% higher than the 2011 low.  However, sales of premium and non-premium brands have witnessed growth of 53% and just 9% respectively.

Non-premium brands – Not all non-premium brands have missed out on a ‘premium-style’ recovery. 2017 represented a record year for SEAT (+18% y/y) and Skoda (+10% y/y) dealers.  These two brands alongside Alfa Romeo (+39%), Citroen (+13%) and Toyota (+13% y/y) all recorded double-digit growth last year. Some non-premium brands posted hefty double-digit declines last year, these include: Subaru (-38%), JEEP (-37%), Renault (-25%), Smart (-23%), Vauxhall (-21%), Mini & Dacia (-17%), Fiat & Peugeot (-16%) and Nissan (-14%).

New comers stealing market share Kia (+267%), Skoda (+101%) and Hyundai (+98%) have been the standout non-premium brands over the last decade. Their impressive rates of growth in sales contrast starkly with a 26% decline in non-premium brand sales. Kia, Skoda and Hyundai have seen their share of the overall new car market increase from 5% (2007) to almost 15% (2017).

Lost decade for some brands – While some non-premium brands have performed strongly since 2007, other established brands have seen their sales plummet. Peugeot, Renault and Vauxhall have seen their sales fall by 54%, 58% and 62% respectively. Sales of Peugeot & Vauxhall cars hit a series low last year (data from 1999). Furthermore, the combined marked share of these brands has almost halved from 28% in 2007 to <15% in 2017. Japanese brands have also lost out to their Korean and Eastern European rivals with Mazda, Toyota and Honda sales down 42%, 49% and 54% respectively since 2007.

Start your engines! – We’re not all in this together – Meanwhile some of the ‘super car’ brands recorded the fastest rates of growth last year.  Sales of Aston Martins trebled to 27 last year but are still below 2007’s peak of 45. Maserati sales accelerated to a record high of 81 in 2017, more than doubling relative to 2016. Bentley sales jumped 52% y/y to an 11yr high. Ferrari sales rose by over one-quarter to 19 in 2017, two shy of 2015’s high. Unlike in 2016, there were no sales of Rolls Royce or Lamborghini’s in 2017.

Size can be everything – Overall, the new car market illustrates that even if a market if falling overall there are always winners and losers irrespective of market conditions. Furthermore, there are always markets within markets e.g. premium brand versus non-premium brands.  The success of the premium brands can be attributed to quickly responding to consumer tastes (e.g. preference for SUVs) and providing quality, affordable products for a range of budgets. Following the recession and cost of living squeeze, it was noted that SUVs got smaller to appeal to those with more limited budgets. In addition, premium car brands have targeted the lucrative Motability market. Conversely, many of the non-premium brands that have experienced the steepest fall in sales were slow to respond with SUV models.

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Chief Economist’s Weekly Brief – Catch-up


A New Year so an opportune time to do a bit of a stocktake. In this extended brief we take a look back at 2017 and ahead to 2018.

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UK Growth and the Labour Market

Downslope. How does the UK economy’s performance in 2017 stack-up?  We won’t know definitively for a few weeks but it looks as if growth will be around 1.8%. That’ll be the slowest since 2012 just before the recovery accelerated. And it’ll be below the post-war average of about 2.5%. But it’s far from diabolical. A modest slowing is the consensus view for 2018 with growth of 1.5% pencilled in. 2019 looks similar. On the ground it means things won’t feel much different. And it’ll leave the UK as a lower-middle G7 performer (below the US, Germany, France and Canada, but above Italy and Japan).

Buttress. The last PMI reading of the year supports the above view. December’s headline figure for the UK services sector rose to 54.2 from 53.8 in November. But new business slipped to its lowest reading since August 2016 and although confidence over the future improved the reading was well below its long-run average. The UK manufacturing sector was a bit better. Its reading of 56.3 pointed to solid growth with output, new orders and employment all looking good (weak sterling and stronger global growth take a bow). Steady as she goes for the UK economy as it enters 2018.

Party over. In the three months to October last year there were 325k more people in employment (and all full-time jobs) compared to the same point in 2016, pushing the unemployment rate down to 4.3% from 4.8%. The problem was that after strong job growth in H1 the UK jobs machine ground to a halt around mid-year. The consensus forecast is for employment growth of 0.5% in 2018 (half the rate of 2017) and for the unemployment rate to remain unchanged (the lowest since the mid-1970s). Here’s hoping the jobs machine just spluttered. Something more permanent would leave the UK in bother.

UK Prices and Wages

Squeeze here
. The re-emergence of the consumer squeeze was the key trend in 2017 with inflation outpacing wage growth since February. The latest reading (November 2017) shows inflation running at 3.1%. It was below 2% at the beginning of the year. That’s sterling’s Brexit-related correction at work. The expectation is for a gradual moderation over 2018 but it’s still forecast to be above 2% come Q4. If UK wage growth doesn’t improve the squeeze will endure.

MIA. “Where’s the wage growth?” ran the cry from workers (and economists) again in 2017. October’s data showed UK wages growing at 2.5%, a year earlier it was 2.4%. In the past 108 months wage growth has reached 3% a mere three times, leaving incomes susceptible to being squeezed with even modest bouts of inflation. Surveys suggest employers are feeling the pressure to raise wages. But they have reported similar developments to survey takers for years with no material improvement in the hard data.

Figure it out. It’s the enduring puzzle for policy-makers. Will 2018 see higher wage growth as tightening labour markets finally prompt the bidding up of wages, and potentially inflation with it? Or has the landscape been permanently changed by technological change and globalisation and a host of other factors including reduced union membership, meaning low wage growth is a permanent feature?  And what’s the best response to that?  Is it low rates to to keep inflation in line with central banks’ 2% inflation targets? Or is it higher rates to prevent things like asset price bubbles? Big questions leaving plenty for policy-makers to grapple with in 2018.

Gently. Greater clarity on the above would give greater clarity on the outlook for rates. But markets don’t expect November’s 25bps hike in Base Rate to 0.5% to mark the opening salvo in a steady tightening cycle. At the moment they indicate we’ll be into the next decade before Base Rate hits 1%. However, the Bank of England thinks there might be a need for a little more urgency if the economy performs in line with their expectations.

Light. Closely related to the issue of weak wage growth is, of course, paucity in UK productivity growth. Output per hour is an astonishingly small 1.3% higher than it was in 2008. As the Office for National Statistics reminded us last week this is among the weakest since official records began and could be the weakest since the early 1820s. But there was some  good news last week, giving a modicum of hope for 2018. Productivity grew 0.9% in Q3 2017, the largest increase since Q2 2011 and reversing the falls of the previous two quarters.

Slowing. UK house price growth continued to slow in 2017 with prices estimated to have risen by just under 3% according to Nationwide. London bore the brunt of the slowdown with prices in the capital falling 0.5% last year, the first decline since 2009. Stretched affordability, tax changes and political uncertainty are among the factors. According to the Royal Institution of Chartered Surveyors prices could remain virtually flat in 2018, with constrained supply preventing outright declines. The consensus is for very weak price growth of 1.7%. It will give wages an opportunity to catch up.

The Global Picture

Cracker. There’s plenty of optimism surrounding the global picture. The strengthening of the eurozone’s recovery during 2017 was the upside surprise. And there’s reason to believe it still has legs. Inflation is low and there’s plenty of spare capacity (high unemployment). Monetary policy, too, remains very supportive. The breadth of the recovery in the eurozone is the most striking feature. The big four of Germany, France, Spain and Italy are all firing. The consensus is for the Eurozone to notch up another year of 2% growth, its fourth in succession and its best performance in a decade.

Unflappable. After 1.5% growth in 2016 the US economy looks to have moved back above the 2% mark in 2017 (Trump impact?). The forecast is pretty rosy with 2.5% the estimate for 2018 amongst the consensus. Like the UK job growth has been good and unemployment is very low. But so too is wage growth. In contrast to the UK the inflation issue in the US last year (as it was in the Eurozone) was its weakness. That didn’t deter the Fed, which is putting more weight on the traditional relationship between unemployment and inflation, expecting price pressures to ignite at some time or another and wanting to pre-empt it. It hiked three times last year with three more forecast for this year. Although a new Fed Chair may alter that.

Back on the radar. China almost quietly churned out a growth figure of what looks to be close to 7% last year. 6%+ is the forecast for 2018. Nothing to worry about here? Perhaps not. After some time on the sidelines 2018 could well see China clamber the list of financial and economic concerns. Its all-important property sector is showing signs of fatigue. And the usual concerns of too much debt, too quickly, remains There’s an added layer here of household debt having risen sharply, in addition to corporate debt. But after President Xi Jinping fully established his power base last year 2018 is set to see more meaningful economic reform, apparently. It just might not be the economic liberalisation programme long expected.

Populism – so last year?

Ride the wave.The populist upsurge of recent years is unlikely to be done. Deep, structural forces lie at its heart. Globalisation and technological change, particularly the latter, are forces with brute strength. Among their consequences in the UK are issues of geographical and wealth inequality. And they’re tricky for policy to respond to. But some home-made factors aren’t helping, namely housing policy and what is for some the receding prospect of home ownership. These are not things that can be solved quickly. And there’s a fair chance they will intensify. What’s uncertain is how populism will manifest itself. An election result that up until last year seemed unthinkable?  Or a policy response with unintended consequences?

And finally…

Events, dear boy. Chances are much of the above won’t turn out as predicted. Events have a nasty habit of taking things off in a different direction. And it would be a dereliction of duty as economists not to dish out some warnings. Geopolitcal tensions may buck the trend of recent years and ignite the oil price, prompting a squeeze on the consumer. Iran has already hit the headlines with rumblings of discontent. Unresolved issues in the euro area may flare up. The Italian election may return an out and out populist and a sharp change in policy. The unwinding of quantitative easing in the US might spook the market.  US rate hikes and dollar strengthening may prompt a casualty in emerging markets. And of course there’s Brexit negotiations. Oh and Bitcoin…..no predictions here, I’m afraid.

Watch out for our Northern Ireland review and outlook tomorrow.

2017 a positive year but dogs on street know there are challenges ahead

Overall, 2017 has probably been a more positive year for the Northern Ireland economy than many would have expected. A wide range of indicators have improved during the 12 months, including private sector employment (now at a record high), construction activity, and both tourism and trade. However, many other indicators have been on the decline, and there are also some clear warning signs that the economy will begin to slow down in 2018. Here is a flavour of some of the key trends we have seen this year, and which will set the context for moving into the 12 months ahead. Continue reading

Chief Economist’s Weekly Brief – Over and out

The UK economy can chalk up 2017 as a decent, if unspectacular, 12 months. Growth will likely be slower this year compared to last, but not by much. The trouble is some signs of weakening are appearing, most importantly on the jobs front, after what has been a lengthy period of economic expansion. A bumpier 2018 ahead?
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The highs and lows of Northern Ireland economic statistics

This is an important week for understanding what has been going on within the Northern Ireland economy. We had four surveys released yesterday by NISRA – two on the labour market and two on private sector output. Within them, there was a variety of highs and lows, some of which are positive and some of which are concerning.  For the labour market, the two key releases were the monthly Labour Force Survey (LFS) and the Quarterly Employment Survey (QES).  The latter is the most closely watched survey of the number of jobs in the economy. Meanwhile the other two surveys shed light on private sector output in the third quarter. These were the Index of Services and the Index of Production (industrial production / manufacturing output). So what do they tell us about the local economy? Continue reading