Six years of inflation comes to an end in February

According to the latest Ulster Bank NI PMI, Northern Ireland’s private sector firms reported their third successive month of falling output in February. Beneath this headline, however, there were signs of improvement relative to the January report, when there was a simultaneous decline in output, new orders and employment, with only the services sector in expansion mode.

February’s report confirmed that firms’ order books were growing again and they were adding to their staffing levels. Furthermore, the manufacturing and construction sectors returned to growth following a brief period of contraction.  To date, the only sector that has experienced a sustained period of falling activity and employment is the retail industry.  Local retailers have signalled falling output since last September. Clearly, with sterling trading at its highest level against the euro since late-2007, retailers will be experiencing low levels of cross-border trade. Conversely, the retail and hospitality industry along the border in the Republic of Ireland will be benefiting from increased custom from Northern Ireland consumers.

Up until now, the services industry had been the one sector immune to the recent stagnation / mini-contraction.  However, the service industry’s nineteen-month streak of continued growth in both output and orders came to an end last month. It remains to be seen whether the sharp reversal of fortunes in the latest survey is just a blip for service sector firms. The sterling / euro exchange rate and the forthcoming public expenditure cuts represent two headwinds for the sector. Sterling’s strength against the single currency also represents a significant challenge for our manufacturing and agri-food sector. This is undoubtedly a factor behind the decline in exports last month.

Employment growth across all sectors bar retail is the most positive aspect of the latest survey. Indeed, Northern Ireland’s private sector is still increasing its staffing levels at a rate that exceeds the long-term average prior to the downturn. Encouragingly, there is no sign of a slowdown in the pace of employment growth within the economy’s largest sector. Northern Ireland’s services firms increased their staffing levels for the twenty-first month in succession in February, with job creation rising last month at its fastest rate in seven months.

Disinflation and deflation are key themes across all economies at present.  These trends are also evident in Northern Ireland, with local firms reporting no input cost inflation for the first time in 6-years. Indeed, the manufacturing sector reported deflation (falling costs) for the first time since February 2009. This falling cost-base, aided by the decline in oil and commodity prices and a strong pound, does not automatically translate into increased profits. Firms across all sectors, bar construction, are passing on these cost-savings and reducing prices in order to remain competitive. Manufacturers are discounting prices at their fastest rate in five years.

Once again, the latest survey is something of a mixed bag. However, the overall tone is more positive than the January survey. Nevertheless, the key concern is the continued divergence in the strength of the recovery relative to the rest of the UK and the Republic of Ireland. Low inflation will act as a strong tailwind for households in 2015. However, this will be offset by headwinds stemming from the public expenditure cuts and the sterling / euro exchange rate.

You can download the full report, video, audio and slide pack here.

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