Yesterday saw the first publication since the EU referendum on 23rd June 2016 of quarterly Northern Ireland (NI) Services Sector & Industrial / Manufacturing output statistics.
Together, the Q3 figures point to a contraction in private sector output, something that had also been signalled by the Ulster Bank NI PMI. Factors other than the referendum are responsible for the steep decline in manufacturing output. A number of large firms in the process of winding down (e.g. JTI & Michelin) have a major bearing on the output figures.
The biggest impact from the Brexit vote to date is the depreciation in sterling. This will act as a boost to manufacturing exporters in the coming months. Meanwhile the retail and hospitality sectors appear to be benefiting from sterling’s weakness in Q3. Again this factor is likely to encourage further growth in Q4 and into 2017. Overall, the contraction in Q3 is somewhat concerning as the local economy loses momentum going into what should prove to be a challenging year.
Manufacturing Output
Northern Ireland’s labour market has recouped almost all of the jobs lost during the downturn. However, the same cannot be said for private sector output. The latest output figures for the industrial / manufacturing and services sectors highlight that a full recovery in terms of output still remains some way off. The Ulster Bank Northern Ireland PMI signalled that the private sector contracted in Q3, due to the services sector (ex-retail) and construction. (The manufacturing and retail PMIs pointed to continued growth.)
The official releases today signal a very sharp fall in manufacturing output in Q3. At -2.6% q/q, this represented the fastest rate of decline since Q2 2009 and was three times bigger than the fall recorded by the UK’s manufacturing industry. Moreover, the latter still managed to post growth on a year-on-year basis (+0.9%) whereas Northern Ireland’s manufacturing output decreased by 2.4% y/y. Northern Ireland manufacturing output is currently at a 2½-year low.
This underperformance relative to the UK reflects an overexposure to a number of large firms, including Bombardier, Seagate, Michelin and JTI. The winding down / closure of the JTI tobacco plant will largely be responsible for the hefty 4% q/q decline (-8.1% y/y) in the Food, Drink and Tobacco sector in Q3. Output within this sector has fallen by almost 14% in just three years, and in Q3 represented the lowest level in over 11 years.
Northern Ireland’s engineering sector, which accounts for almost one-quarter of manufacturing output, has experienced sizeable declines in output too. Since Q2 2015, engineering output has fallen by over 11%. Within engineering, Transport Equipment (which includes Bombardier & Wrightbus) has fallen by 9% q/q in Q3. Meanwhile the Computer, Electronic, Electrical & Optical Products sector (including Seagate) has seen output plunge by 14% over the last year. Output within the sector is now at its lowest level in almost 7-years. The winding down of Michelin probably explains a large part of the 3.1% q/q fall (-4.6% y/y) decline in output within the Rubber plastic & non-metallic minerals sector.
Looking at some of the other manufacturing sectors, Basic & fabricated metal products saw output decline sharply in Q3 (-4.5% q/q). However, we need to bear in mind that the Q2 figure was a record high. Similarly the Chemical & Pharmaceutical Products sector has been growing strongly in recent years. Despite a quarterly fall of 3.2% in the latest quarter, output within the sector is still almost 14% higher over the year. The fastest growing manufacturing sub-sector over the past 12 months is the manufacture of wood and paper products. Output in this sector has increased by 22% in 18 months to an 8-year high. This category includes firms within the renewable energy sector.
Services Output
Northern Ireland’s private services sector posted its first quarterly decline in six quarters in Q3. The 0.5% q/q decline compared with growth of 0.8% q/q for the UK. Despite this latest decline, output within the private services sector still managed to post a robust 2.8% rise over the year (UK = +3.0%). However, NI’s recovery has been significantly weaker than its counterparts in the UK. UK service sector output is 12.7% above the level in Q2 2008. The equivalent sector in NI has output still 5% below the Q2 2008 level and almost 7% below the pre-downturn peak of Q4 2006 (UK = +17%).
Northern Ireland’s private sector services category is dominated by (i) business services and finance and (ii) wholesale and retail trade; repair of motor vehicles and accommodation and food service activities. These two areas account for almost 70% of private services activity. The business services and finance sector (BSF) posted a 1.1% q/q decline in Q3 (UK=+0.3%). Despite this fall, however, output was still 2.3% higher over the year to Q3 (UK +2.3%). NI’s BSF sector has experienced only a minimal recovery from its recessionary lows. Local BSF output is up just 3.3% since its Q1 2014 low. This is still a whopping third below the pre-downturn ‘freak peak’ of Q3/Q4 2006. Meanwhile UK BSF output has never been higher.
NI’s wholesale and retail trade; repair of vehicles and hospitality sectors was the only part of private services to record growth in Q3. The sector posted a 0.9% q/q rise (UK = +1.1%) in the latest survey and output is 3.7% higher over the year (UK = +4.8%). This sector will be a major beneficiary from sterling’s weakness against the euro. A surge in cross-border shopping (South > North) and a buoyant tourism sector should see further growth in Q4 and into 2017. Output within the sector is still almost 5% below the pre-downturn high recorded in Q1 2007. Conversely, UK output in the equivalent sector is almost 16% higher over the same time period.
The transport, storage, information & communication sector (TSIC) saw output fall by 1.1% q/q in Q3 (UK +2.3%). This decline was coming off a record high in output in Q2. Despite this quarterly decline, output within the TSIC was 0.3% higher over the year (UK +4.1% y/y).