Belfast Telegraph

Positive economic statistics to start the year but challenges lie ahead

Andrew Park
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The latest Northern Ireland economic statistics show that the local economy had probably regained pre-pandemic levels by summer last year, a remarkable turnaround given the relative gloomy outlook many economists had foreseen for the year at the beginning of 2021.

Looking ahead into 2022, the prospects remain upbeat continuing on the trend set in the second half of 2021, yet a number of headwinds could hamper progress.

Ongoing challenges surrounding the NI Protocol will need to be resolved, and the looming Assembly election in May is likely to see posturing and uncertainty remain for some time. While recent inward investment announcements point towards a growing body of evidence for the economic benefits of the protocol, businesses need certainty, which is in short supply. Key to the uncertainty is the pandemic and ongoing cycle of variants.  While these challenges have been at the forefront of the economic narrative, and will remain important, other challenges have emerged over the past six months, which are expected to feature prominently in the months ahead.

Inflation. As the economy reopened, demand for goods/services increased sharply. However, as businesses tried to meet this increased demand they have struggled to source supplies, causing a spike in supplier prices. A shortage of microchips and the Suez Canal blockage didn’t help matters. Add to this, eye-watering increases in energy costs and inflation has reared its head. The current UK inflation rate is 5.1%. To dampen inflation and cool consumer demand, the Bank of England raised interest rates from 0.1% to 0.25% in order to bring inflation back in line with their 2% target. In our view the current inflationary pressures are more transitory, with pressures likely to dampen by the end of 2022 as supply chain pressures ease and prospects brighten.

Staff Shortages. There was trepidation that when the furlough scheme ended, unemployment would increase dramatically. Obviously sectors that are still operating under restrictions are rightly worried and frustrated, but the general labour market appears to have taken the end of the furlough scheme in its stride. Vacancy levels are ahead of pre-pandemic levels, and the challenge is now one of there not being enough candidates to fill roles. Current vacancies stand at a record high of almost 25,000.

Uncertain consumers. While consumer sentiment has been broadly stable over the past six months, there remains an air of uncertainty. Omicron, inflation, and the Bank of England’s move on interest rates dampened consumer confidence during December according to the Growth for Knowledge (GfK) consumer confidence tracker. Of particular note is that people are less confident about their personal finances over the next 12 months, suggesting that ‘big ticket’ item purchases could be delayed. Should consumers ‘hunker down’ to see how the next 12 months evolves, growth could be softer than currently envisaged.

The challenges outlined are not guaranteed and so, on balance, prospects for growth remain strong. Indeed, Grant Thornton’s forecast for growth this year is 6.4%. With this being mostly driven by the strong bounce back in employment and overall business activity.