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).

Today we received a batch of official output figures from NISRA which confirmed what other surveys had been signalling. That is a strong pick-up in economic growth in the second quarter of 2021.  The latest Industrial Production and Index of Services (private sector only) from NISRA have made this rebound official. Both surveys revealed a return to growth in Q2. These two indices account for the vast majority of Northern Ireland’s Composite Economic Index. Given the scale of the increases revealed today, it is inevitable that the Composite Economic Index (a proxy for GDP), when published on 30thSeptember will reveal a sizeable rate of expansion.

Levelling-up. Private sector services saw activity jump by 5.5% q/q (UK +5.8%) in Q2 2021. That may only be a fraction of the 24.9% q/q record surge in Q3 last year. Nevertheless, it represented the second largest quarter-on-quarter rise in the series.  Before the pandemic, the Index of Services’ largest quarterly growth rate was 2.7%. However, record rates of growth were achieved across all services subsectors, albeit through the year-on-year variety as opposed to last year’s record quarter-on quarter rates of growth / decline. Again this was expected and resulted from base effects (very low levels of output during Lockdown 1.0) in Q2 2020. Overall private sector services activity increased by 29.2% y/y (UK +21.0%)but this record rise says more about how poor last year (Q2 – the base) was rather than the strength of Q2-21. Following this record year-on-year rise, services output is just 1.2% below its pre-pandemic level recorded in Q4 2019. So the services sector can see the finish line (returning to pre-pandemic levels of output) on the horizon. Getting there, or indeed staying there, may not be quite as straightforward and depends on the fortunes of the largest sector – Wholesale and retail trade; accommodation and food.    

Last orders for consumer boom? The reopening of the hospitality sector coupled with a staycation boom helped propel growth in the Wholesale and retail trade; accommodation and food sector in Q2. Northern Ireland also benefited from custom from the Republic of Ireland’s consumers who were still subjected to lockdown restrictions. The 8.3% q/q growth rate was the second largest expansion to date after Q3 2020’s bumper 26.5% q/q rise and took the year-on-year increase to 30.1%. Output within this subsector hit its highest level in almost 14 years when Northern Ireland’s property boom was in full swing.  Back then debt and equity withdrawal helped prop up consumer spending. As in 2007, H2 2021 may well mark a high watermark for the consumer spending sensitive sectors.  The High Street Voucher Scheme will provide a shot in the arm for the retail sector in October and November. But while this stimulus is being injected into the economy other stimuli are being withdrawn. The temporary £20 per week top up for the 134,000 Universal Credit benefit claimants in Northern Ireland expires at the end of September along with the furlough scheme. Meanwhile the temporary 5% VAT rate for the hospitality sector rises to 12.5% from 1 October before returning to 20% by 1 April 2022.  That will not be the only tax rise with National Insurance Contributions due to be hiked from next April too. Between now and then businesses and households face the considerable headwind of mounting inflationary pressures, particularly in terms of energy and food prices. Consumer spending is set to be squeezed in 2022.

The Others. Business services and finance was the only services sector not to post growth in Q2 2021. Following three successive quarters of growth and returning to pre-pandemic levels of output in Q1, the Business services and finance sector saw output fall by 1.9% q/q.  Nevertheless, output was up one-fifth relative to a year ago.  Transport, storage, information & communication saw output eclipse its pre-pandemic level (Q4 2019) in Q2. This sector which includes the logistics industry (which has benefited from online shopping) and the pandemic resistant ICT sector. Output rose by 4.2% q/q and by 27.5% y/y. Finally, the services sector hit hardest from the pandemic is the ‘Other Services’ category. This includes the arts, recreation, leisure, hairdressers, beauty treatment, dentists, theatres, cinemas etc.  Social contact and the close proximity of people is essential for these businesses to operate.  Output within Other Services jumped by 13.9% q/q in Q2 and by a whopping 47% relative to the same quarter a year ago. But despite this surge, less than 60% of the output that the sector has lost has been recouped so far with the industry running at 80% of pre-pandemic levels. Returning to Q4 2019 levels of activity is not going to happen anytime soon and is likely to be a relatively long slow recovery dependent on consumers’ attitudes and behaviours. 

Modest by comparison. Northern Ireland’s industrial sectors, at an aggregate, level saw more moderate rates of growth in Q2 2021.  Industrial production and manufacturing output increased by 1.1% q/q and 0.8% q/q respectively. Although both indices posted record year-on-year growth rates of over 27% in Q2.  Both industrial production (-0.8%) and manufacturing output (-0.7%) are less than 1% below their pre-pandemic (Q4-19) levels of output. It should be remembered that Northern Ireland manufacturers recouped almost all of their post-pandemic slump in output in a single quarter (Q3-20).   

Mixed bag – Only four of Northern Ireland’s ten manufacturing sub-sectors posted quarterly growth in Q2 2021. These included: Transport equipment +8.7%; Textiles, leather & related products +8.6%; Wood & paper products & printing & reproduction of recorded media +5.5%; and Food, beverages & tobacco products +2.7%. However, nine of the ten subsectors recorded double-digit year-on-year growth ranging from 10.4% for Computer, electronic, electrical and optical products to 95.7% for Other Manufacturing

Recovered. But more encouraging is the fact that six of the ten manufacturing subsectors had output in Q2 2021 above pre-pandemic levels (Q4-19). Textiles & related products  (think PPE during the pandemic) is the best performer with output 27% above Q4-19 levels. The manufacturer of chemical and pharmaceutical products saw output hit a record high in Q3 2020 with output currently 19% above pre-pandemic levels. Rubber and plastics (+16%) is another strong performer that has benefited from supplying protective screens and equipment. Meanwhile the manufacture of Food and beverages (+7.7%) has benefited from the NI Protocol by displacing GB suppliers to the Republic of Ireland market. This trend looks set to continue. At the other end of the spectrum is the Transport Equipment sector which includes aerospace and the artist formerly known as Wrightbus. Output within this sector remains a whopping 44% below Q4-19 levels. This highlights the severe challenges facing the global aerospace industry. It remains to be seen if we see a sector specific furlough extension for aerospace is granted until there is a meaningful pick-up in the global airline industry.

An unbalanced recovery – At an overall sector level (i.e. manufacturing and services) it would appear than the finish line for the recovery is closing in. Manufacturing output in Q2 2021 was less than 1% below its pre-pandemic level while services output is just over 1% adrift of the same benchmark. The speed and scale of the recovery presented in these figures is perhaps surprising given that total hours worked still remains well below pre-pandemic levels. Some 44,000 – 100,000 people were on furlough at some stage during Q2 2021.  The rebound in output viewed in this context suggests Northern Ireland has seen a much needed surge in productivity. It remains to be seen if this is in fact the case. But as the table above highlights, the aggregate level conceals contrasting fortunes at a sub-sector level. Some industries haven’t broken their stride during the pandemic with many actually prospering. Conversely some sectors, notably Other Services and Transport Equipment  have a long way to go.  This highlights the need to be wary about headlines in the coming months that Northern Ireland has recovered all of the output it lost during the pandemic. Looking at a wider range of indicators and different sectors will tell something a completely different story. It is also worth remembering that Northern Ireland failed to recover the output it lost from the previous recession before the pandemic struck last year. That particular finish line is still out of sight.

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