Economy can weather the immediate storm but must look to longer term competitiveness challenges

2023 has started with a similarly uncertain outlook. Grant Thornton’s own economic modelling suggests that the Northern Ireland economy will contract by 1.3% this year. We have arrived at this forecast based on reams of data and insights gathered from across our economy but we do so with caution. Even in more certain times, forecasts are a risky endeavour. In the grips of exceptionally high inflation, increasing interest rates, the war in Ukraine, and a local public sector budget crisis, forecasts are firmly in ‘based on what we know today’ territory. Of course, what we know today might all change tomorrow!

What we do know today is that globally, central banks are still on the path of higher interest rates, inflationary pressures have not left the stage and the energy cost crisis is far from over. While prices have come down in recent months, they do remain far above historic levels and are unlikely to return. There is also the risk that China’s easing of pandemic restrictions sees significant oil demand growth, which would add inflationary pressure to global energy prices. I expect these issues will continue to pose a significant challenge to business performance in 2023. A recent survey by the Association of Chartered Certified Accountants found interest rates and inflation were having a detrimental effect on 69% of SMEs while 38% of SMEs believe their biggest challenge for 2023 will be rising energy and business costs.

Locally, we are not immune to global issues, and we can also add our own challenges to the mix. I have written before that Grant Thornton’s work with the Consumer Council concluded that the economy here relies on consumers for about 70% of economic activity. We used to hear about JAMs – people who are ‘just about managing’ – and the squeezed middle. For many here it is now a case of having been squeezed until the pips squeaked. Latest insights from the Consumer Council’s Cost of Living Pulse Survey suggest that 75% of us have cut back on essentials after paying housing costs and servicing debt.

The proportion of households saying they are able to cope with bills and pay for essentials has been falling significantly between over the past six months, from 56% in July to 45% now. Also, more consumers (24%) are reporting that they have only £50 or less left to live on in a typical month after paying their mortgage/rent and essentials. So, with less spare money around, those responsible for managing our public finances find themselves in the unenviable position of proposing rates increases. Belfast City Councillors set an increase of 7.99% and other councils are on a similar path with their local rates. We’ve yet to see what the regional rate rise will be from the Secretary of State, but it could be a double digit percentage increase.

These rates increases are more a result of having to meet inescapable cost rises rather than building funds for strategic initiatives so the reactionary approach to economic events does not show any signs of abating. That is a shame as there are many strategic initiatives here that could do with some attention. Chief amongst those is arguably climate, although I’m sure there are many that could argue for education, housing, transport, poverty etc., with compelling cases.

On the energy challenge, I noted with interest that Rishi Sunak has shuffled the deck and created a new department for energy security and net zero, a move designed to bring more focus to the UK’s need to move to net carbon zero. While energy has been a department in its own right before, with limited impact, this move does at least signal an intent. Maybe it will also lead to greater investment into the energy and climate challenge. This is where we need to get to in the local economy – all the major challenges that are holding back our economic competitiveness are well known at this point.

Given how unlikely it is that we will be able to find significant sums of money to solve these challenges, it feels to me like we need a coalition of all the social partners to come up with the solutions that will address the competitiveness challenges that could otherwise leave us stuck permanently worse off.