According to the latest PMI, Northern Ireland’s private sector has not had the best of starts for 2015. Local firms reported their first simultaneous decline in output, new orders and employment since May 2013.
However, economic conditions are perhaps not quite as bad as this headline suggests, at least not for all sectors. The declines in both new orders and employment were marginal. Meanwhile one decline that is welcome is the easing of inflationary pressures. Falling fuel costs have helped to push local input cost inflation down to a 31-month low. This factor, alongside competitive pressures, has led firms to reduce their prices at the sharpest rate since February 2013.
In December, the manufacturing and retail sectors pulled the overall business activity index marginally below the expansion / contraction threshold (50.0). Last month, these two sectors were joined in contraction mode by the construction industry which recorded its first fall in output in twenty months. The declines in these three sectors failed to offset the pick-up in business activity within the services sector. The economy’s largest sector recorded its nineteenth consecutive month of expansion with the rate of growth in January faster than that recorded in December.
The services sector was the one bright spot in an otherwise disappointing survey. It is encouraging to note that Northern Ireland’s service sector firms also saw their rates of new orders and employment growth quicken in January. Furthermore, the rate of service sector job creation in January was in line with the long-term average growth rate that preceded the downturn. The construction industry also increased its staffing in the latest survey which extends the period of employment growth to seventeen months. The manufacturing industry posted a relatively modest decline in employment in January whilst the retail sector reported the sharpest fall in staffing levels.
The forward looking new orders index ended its nineteen-month winning streak of expansion in January. However, the marginal decline in the headline index concealed contrasting fortunes at a sector level. The services industry, for example, reported its steepest rise in new orders in six months whereas manufacturing firms saw their order books expand by a modest amount. Following the strong rates of growth in orders in December, construction firms reported a big swing back into contraction territory in January. It is too early to establish whether this is a blip as opposed to the start of a downward trend.
Retail, however, does appear to be on a downward trajectory. Local retailers reported the sharpest fall last month with new orders contracting at their fastest rate since October 2012. The second half of 2012 was a period of relative sterling strength against the euro. However, sterling is significantly stronger today than it was in H2 2012 and is currently at a seven-year high against the single currency. As a result, cross-border retail trade will be moving in the North-South direction as opposed to South-North which has been the dominant trade pattern for the last 5 years or so. It should be remembered that the Republic of Ireland’s hospitality sector also enjoys a VAT rate (9%) that is less than half the rate prevailing in Northern Ireland (20%).
Overall, the latest survey is something of a mixed bag. The continued strength of the local services sector is perhaps overshadowed by the fact that Northern Ireland’s economic recovery is continuing to diverge from the UK. The sterling / euro exchange rate is one factor that impacts local firms more than their counterparts in GB. Over the last 5-years, this exchange rate has acted as a tailwind for the Northern Ireland economy. However, in 2015 it is set to be a headwind for the economic recovery.
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