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To that end Economists are like everyone else, except we will look ahead to what potential challenges and opportunities await the economy. While we will admit this is probably a dull exercise to many, we find this is quite a useful task, which will allow us to confidently advise our clients on how to ‘navigate’ the year ahead.
Unlike previous years, there is a temptation to believe that we already know how the year may shape up! For many it is likely to be a difficult 12 months, with the cost of living crisis expected to continue, and inflation to remain high until the third quarter. This is despite inflation likely having peaked, although we will see what happens when government energy supports ebb away. Whilst falling to 10.5%, inflation levels are still excessive and will continue to exert significant downward pressure on household income and expenditure. This downward pressure, the Resolution Foundation reports, has seen three quarters of UK adults trying to cut back on the their spending in order to cover the rising costs of necessities. This issue has been further exacerbated by falling real wages. According to the Office of Business Responsibility (OBR) real wages will fall over the 2022-23 period, the first time they have fallen in consecutive years since the Global Financial Crisis. As a result of rising costs and falling real wages, absolute poverty across the UK is predicted to rise in the short term, from 17.2% (2022-23) to 18.2% (2023-24). In fact, the impacts are expected to result in a sharp decline in living standards, with real wages not anticipated to return to the level seen in the first quarter of 2022 until 2027, according to the Resolution Foundation. This is despite inflation forecasted to fall back to more ‘sustainable’ levels by the end of 2023.
This challenging environment does raise the question about the likely impact on the UK and Northern Ireland economy. Most indications are for a recession. Certainly, that is what the Bank of England is gearing us up for. One that lasts until the middle of 2024. Here, recent data releases from the Northern Ireland Composite Economic Index (NICEI) suggests the economy is already in a ‘technical recession’, having experienced two consecutive quarters of falling output. There may be some positive news, with recent economic output figures from the UK suggesting a small pick-up in economic output in November, with output growing by 0.1%. It might be too soon to start searching for green shoots of recovery but this growth, in part a result of the football world cup, and in part due to consumers seemingly ‘pushing the boat out’ for Christmas, might provide a glimmer of hope that a deep recession can be avoided if consumers feel the conditions are right to keep spending.
Despite the economy seemingly entering recession the labour market has remained strong. Between the second and third quarters of 2022, when the economy contracted by 0.3%, the level of total employment actually grew by 1.1%. Not only that, but the Northern Ireland Chamber is citing a growing concern among many companies about recruitment difficulties, with this being one of their most persistent concerns raised in recent employer surveys. This is also evidenced by the most recent redundancy statistics, which showed in 2022 that there were only 730 confirmed redundancies - the lowest level for the past 20 years. While the labour market confounds expectations, it is not all plain sailing, with new job listings beginning to slow down and many more strikes happening, particularly among public sector workers. Calling where the economy goes next with any certainty could be a fool’s errand, but there is a definite sense of January blues at the moment.