www.pwc.co.uk/ni
Northern Ireland Economic Outlook August 2013
Features: • The Northern Ireland economy is showing signs of recovery • Unemployment and redundancies begin to fall • Average hourly earnings have fallen close to 2003 levels • House prices may not recover lost ground until 2025
Northern Ireland Economic Outlook
Highlights NI growth estimated as 0.5% in 2013 and 1.5% in 2014.
UK growth estimated as 1.0% in 2013 and 2.0% in 2014.
Republic of Ireland growth estimated as 1.1% in 2013 and 2.2% in 2014.
GDP Growth (%)
2011
2012
2013
2014
Northern Ireland*
0.3
-0.3
0.5
1.5
United Kingdom
0.9
0.2
1.0
2.0
Northern Ireland (NI) seems to be exhibiting the first tentative signs of recovery; business activity, orders, export activity and employment moved into positive territory in July, with all sectors sharing in the relatively sudden upswing. Nevertheless any recovery is still likely to be slow. NI is mirroring the general UK macroeconomic performance, which has now returned two consecutive quarters of economic growth. NI and the North East of England should grow by 0.5% in 2013 - the lowest of the 12 UK regions; at the other end of the scale the South East is estimated to deliver 1.2% and London will achieve growth of about 1.5% in 2013. To put the NI recovery into context, more than half the UK’s overall private sector job creation has occurred in London (particularly in business services). The international economy remains fragile, given unresolved imbalances in the Eurozone and a recent slowdown in China and other emerging markets. After indications of solid recovery, the Republic of Ireland’s (RoI) Central Bank has downgraded their 2013 growth forecast due to slowing exports. Despite the slowing exports, ratings agency Standard & Poor, has upgraded RoI economic outlook from ‘stable’ to ‘positive’. Further quantitative easing is now unlikely, the Bank of England says interest rates will remain at 0.5% until UK unemployment falls to 7%. In our Outlook Analysis section, we estimate that housing prices will remain relatively flat and may only return to pre-recession levels by 2025.
Republic of Ireland
1.4
0.4
1.1
2.2
Source: Office for National Statistics (ONS), PwC, Central Statistics Office, European Commission (For RoI 2013 and 2014) Note: *NI output growth measured by Gross Value Added (GVA)
Other indicators
2011
2012
2013
2014
UK inflation (CPI, annual average)
4.5%
2.8%
2.7%
2.4%
UK interest base rate (Q1)
0.5%
0.5%
0.5%
0.5%
NI claimant count (June)
59,700
62,900
63,000
62,500**
Source: ONS, PwC (inflation 2013-2014; interest rate 2014); Labour Force Survey (unemployment seasonally adjusted, 16+), Nomis Note: ** This assumes gradual recovery will result in a fall in unemployment but ignores the potential impact of Universal Credit, which may shift claimants from benefits to JSA, thus giving the perception of increasing claimant count unemployment. Key: Shaded boxes represent estimates by PwC
PwC 1
Northern Ireland Economic Outlook
1. Confidence Boost in business confidence, the first increase since July 2007… The Ulster Bank’s Purchasing Managers’ Index for July 2013 reported the first increase in business activity since July 2007, with a PMI score of 56.1 (a score of more than 50 means business activity is higher this month compared to the previous month), a considerable upward movement from the previous month. Business activity, orders, exports activity and employment all moved into positive territory. The increase in export activity and some evidence of recovery in construction were particularly welcome.
Figure 1: PMI Output Index by region, 12 and 3 month average to July 2013 Index (50=no change from previous month) 60 55 50 12 month average
3 months average
45
July’s sharp recovery may be partially a pull through effect from the UK’s PMI, given the relative strength and steady recovery across the UK economy. Nevertheless, while the July figures are a step in the right direction and are to be warmly welcomed, underlying problems remain in the local economy. We are therefore not anticipating any upwards revision in forecast growth at this time.
Source: Ulster Bank Purchasing Managers’ Index (PMI)
Consumer confidence hits a two year high…
Figure 2: NI Consumer Confidence Index, July 2013
Danske Bank’s NI Consumer Confidence Index maps the sentiments of consumers from a base of 100 (September 2008=100). The index has risen to 117; an increase of 13 points in the second quarter of 2013 and 9 points up on the same month in 2012. The index peaked at 121 in December 2009 after the banking crisis and then fell for the following two years before an increase began in September 2011. This increase has continued since then, albeit with some volatility. However, these figures contrast with a steady decline in shopping footfall, which dropped 5.9% in June 2013, as compared with June 2012. Shopping footfall has fallen steadily over the past four months and by this measure, NI fares worse than the UK average, which saw an overall rise of 0.1% compared with June 2012.
Index (100 = no change from previous month) 125 120 115 110 105 100 95 90
Source: Danske Bank, NI Consumer Confidence. September 2008=100
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Northern Ireland Economic Outlook
2. Housing market Average house price in NI is £108,766… The Northern Ireland Residential Property Price Index from NISRA/Land and Property Services (LPS), reports that the NI average house price is £108,766, based on over 3,200 verified sales in Q1 2013. The volume of sales in Q1 2013 was more than 5,500 below the peak of Q1 2007. NISRA/LPS data indicates a 5.9% year on year fall in average house price since Q1 2012. The average price of residential property in Q1 2013 was 53.5% below the peak of 2007. There is evidence of some stabilisation in prices as illustrated in Figure 3 and from the recent survey of estate agents from the Royal Institute of Chartered Surveyors (RICS) where 90% of agents reported prices remaining the same as compared to the previous quarter. The average house price to (average) earnings ratio has fallen to its lowest level in more than ten years, at 3.04. In terms of this admittedly partial measure of affordability, the housing market seems to have returned to the levels of the early 2000s. Housing affordability is only partly driven by price, with a major barrier to real recovery in the housing market being the reduced availability of cash and credit. In NI this is particularly acute as reported in a recent survey from the government backed Money Advice Service. This said that, in 2013, 66% of people in NI were struggling with bills and debt repayments, compared to the UK average of 52%. This represents a substantial increase on the UK average of 35% in 2006.
Figure 3: Housing market transactions and average price, 2005– 2013 Number of Open Market Transactions
Mean House Price
12,000
£250,000
10,000
£200,000
8,000
£150,000
6,000 £100,000
4,000
£50,000
2,000 0
£0 Open Market Transactions
Mean House Price
Source: NISRA/LPS
Consequently, despite affordability having returned to pre property boom levels, any real recovery in the NI housing market will rely on a combination of increased consumer confidence, reduced household debt and a greater willingness on the part of the banks and mortgage providers to lend.
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Northern Ireland Economic Outlook
3. Labour market Claimant count unemployment is falling... The claimant count unemployment rate fell to 7% in June 2013 with 63,000 people signing on for Job Seeker’s Allowance (JSA). This was a decrease of 800 from May and the NI rate remains the second highest in the UK, after the North East of England (7.1%). We estimate a further, small decline in the claimant count over the next 12 months but this does not factor in the potential, albeit indirect impact of Universal Credit, which may shift claimants from benefits to JSA, thus giving the perception of increasing claimant count unemployment
In our March 2013 NIEO, we noted that government policies had the effect of shifting some claimants from long-term benefits to JSA, which is likely to lead to an increase in the perceived claimant count total. The UK government recently announced a cap on the total amount of benefits that non-working people in GB can receive, with government ministers claiming a nationwide fall in JSA claimants as a result. A similar measure is currently before the Northern Ireland Assembly.
Figure 4: Claimant count, 2007-2013
The NI rate is unchanged from June 2012; however the overall UK claimant count rate fell by 0.4% from the same period in 2012 to 4.4%. Figure 4 highlights the gap between the NI and UK rates which developed at the start of the recession and has, if anything widened. In the 18-24 age group, the claimant count has fallen recently; from a rate of 10.1% in June 2011 and 2012, to 9.2% in June 2013.
(%) 8
Levels of economic inactivity remain particularly worrying in NI. Whereas claimant count unemployment only counts those who are looking for work, economic inactivity measures everyone out of work including students, the retired and the long–term disabled. By adjusting to show only those between 16 and 64, we can better assess the utilisation of the potential workforce.
4
Since 2007, 16-64 inactivity has been, on average, 23% in the UK, compared with 29% in NI. More worrying is the 18-24 year old group where NI inactivity is 35% compared to the UK average of 28%. Students count as economically inactive and notwithstanding that NI does have a higher participation rate in higher education, relative to the UK average, much of this gap is symptomatic of a lack of jobs in NI.
7 6 5
3 2
Northern Ireland
United Kingdom
Source: Nomis claimant count (seasonally adjusted)
Structural reforms may continue to make small gains around the edges of the NI labour market, but it is unlikely that they will have a marked impact on unemployment in current conditions of low economic growth, where the supply of labour significantly outstrips demand.
PwC 4
Northern Ireland Economic Outlook
June redundancies fell compared to previous years but real wages remain depressed… Redundancies fell in the 12 months to June 2013, compared to the same period in 2012 (1087 down from 1273). Levels remain below the average of the early 2000s, as shown in Figure 5. Although there was a marked rise in redundancies post 2007, the longer run trend is downwards. This may be indicative of a more flexible labour market, and corroborates the view that more people are moving from full-time to part-time work, which causes a fall in real wages but a less dramatic fall in headline unemployment. That being said, redundancies during ‘normal’ times can be a benign symptom of the natural ‘churn’ in the labour market, whereas in times of higher unemployment, each redundancy is likely to be more painful to those concerned, as finding a replacement job is much more difficult. First quarter figures indicate that, since 2009, the average duration of individuals’ unemployment has shifted markedly from up to six months to more than 12 months. Furthermore, real wage cuts are impacting on individuals and families and suppressing aggregate demand at a national level. Recent data from ONS shows that, since 2009, real hourly earnings have fallen by 8.5% in the UK and 9.8% in NI. The average hourly earnings at the beginning of 2013 had fallen back in real terms, to around the level of 2003, as shown in Figure 6. This hourly measure is useful because it corrects for shifts between full-time and part-time work, allowing us to observe real changes in national incomes. There has been mixed news for the local job market over the past few months. Ulster Bank has revised up its number of forthcoming branch closures to 40, causing up to 1,800 job losses (some through natural wastage) across its network in NI and the RoI, a third of which are likely to be in NI. The NI Prison Service has had to add £30m to its redundancy bill after 500 officers applied for the voluntary scheme. Invest NI increased the number of overseas investment projects by 41% in 20o12/13, from 27 to 38 projects, indicating NI’s continued attractiveness to foreign direct investment (FDI).
Figure 5: NI redundancies, 2000-2012 No. of Redundancies
8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000
Source: Department of Enterprise, Trade and Investment
Figure 6: Real median hourly earnings, 2001-2012 £ / hr
13 12 11 10 9
UK
NI
Source: ONS/ASHE; All employees; 2012 prices; excluding overtime.
PwC 5
Northern Ireland Economic Outlook
4. Future prospects Global economy PwC has revised down estimates for global growth in 2013 to 3.0% and to 3.7% for 2014. Most of this growth continues to come from the emerging market economies, with China, India and Indonesia leading the way. Growth in Brazil and Russia has fallen behind the levels many expected while in China growth is also lower than it was previously. The Eurozone continues to be a drag on global growth and is expected to contract by 0.6% this year, driven largely by the ‘PIGS’ countries (Portugal, Italy, Greece and Spain) all of whom are expected to remain in recession. Low growth is also forecast for 2013 in Germany (0.3%), the UK (1%) and RoI (1.1%), although all three should each add a percentage point over the following year which would result in Eurozone growth of 0.9% in 2014. The US is forecast to grow by 2.0% in 2013 and 2.7% in 2014. Local economy Despite July’s upswing in activity, demand, exports and employment, the available indicators suggest NI is likely to continue to lag well behind the UK average. Recent policy announcements, such as the Economic Pact between Downing Street and the First and Deputy First Ministers (14 June), whilst helpful, are unlikely to change the fundamentals. NI needs to dramatically increase levels of R&D and international competitiveness in order to improve exporting and productivity performances. This in turn could lead to much needed job creation. Inflation Consumer Price Inflation in the UK remains above the Bank of England’s target, at 2.8% for the year to July. July’s CPI figures attribute recent upward movements to price increases in clothing, motor fuels and domestic transport, whilst food and drink, home appliances and air fares all fell in price.
The slowdown in emerging market growth is likely to mean less intense demand for global commodities, with a consequent easing in their prices. As real wages continue to decrease in the UK, it is likely that inflation will begin to ease downwards towards its 2% target but may remain above 2% throughout 2014. Interest rates UK interest rate will remain at 0.5% at least until UK unemployment drops to 7%, according to Mark Carney, the new Governor of the Bank of England. Delivering the Bank’s quarterly Inflation Report, the Governor emphasised that even when the 7% unemployment threshold is reached, interest rates would not automatically be increased. The Bank estimates this 7% goal could take three years to attain and would require the creation of around 750,000 net new jobs across the UK. While this is generally welcomed, any sustained failure to drive down inflation could negate the bank’s commitment to using unemployment as a parallel target. By making interest rate changes dependant on a set economic target, the Governor effectively tied the hands of the Monetary Policy Committee. This adds credibility to the Bank’s attempt to exert “forward guidance” on the markets and to persuade them that interest rates will stay fixed in the medium-term. Foreign exchange Despite a brief rally in July, the pound has fallen significantly since the start of the year. Compared with January, Sterling is now about 7% weaker compared to both the dollar and the euro. As we reported in the March NIEO, the upside of weaker pound i.e. increased export competitiveness is likely to outweigh the downside. This is particularly relevant in NI which has, in general smaller, and more export driven businesses than the UK as a whole. This may be a factor in the recent climb in manufacturing activity, both in NI and across the UK, as expressed in PMIs.
PwC 6
Northern Ireland Economic Outlook
5. Sector dashboards Employment* Sector
Mar 11
Mar 13
Change
Key Issues
Public sector
219,198
215,760
-1.6%
Construction
33,370
29,510
-11.6%
Relatively benign Spending Round 2013 (especially for capital) but “doing more for less” is still a key objective in public sector policy, with new Finance Minister Simon Hamilton, promising reform. Small increase in Executive’s borrowing power for 2015/16 but in general NI is behind Scotland and Wales regarding a debate on any wider fiscal powers. A trend in declining output was reversed in July, while there are tentative suggestions of bottoming out in housing market. However, this does not indicate a clear recovering trend. Executive’s longer term capital spend plans depend critically on the extent of “alternative” (i.e. publicprivate) financing.
Tourism and leisure
52,700
52,880
0.1%
External tourist numbers increased in 2012; hotel occupancy is back to pre-recession peak. Need to spread gains beyond greater Belfast. The UK City of Culture has provided a boost to the North West.
Food processing**
16,540
16,540
0.0%
Sensitive to exchange rate fluctuations especially competition in the RoI market or with RoI producers. Very ambitious targets in the action plan for agri-food; Going for Growth: Investing in Success.
Financial services
32,690
30,870
-5.6%
Is Ulster Bank’s strategic significance to the NI economy included in any UK government plans to return RBS to private sector?
Retail
113,750
112,590
-1.0%
Performing less well than GB in terms of footfall with worrying numbers of vacant premises. On-line challenge continues to grow.
Manufacturing***
54,220
54,750
1.0%
Some recovery evident, but the sector is sensitive to exchange rate fluctuations and with some of the highest energy prices in Europe.
All other sectors
176,232
179,260
1.7%
Total 698,700 692,160 -0.9% Note: *: Employees only (i.e. excludes self-employed). **: Food processing and drinks (excludes tobacco). ***: Excluding food processing. Source: Quarterly Employment Survey.
PwC 7
Northern Ireland Economic Outlook
6. Outlook analysis – Housing market From the ‘good’ times… Over the ten years of Q3 1997 to Q3 2007, average real house prices (using ONS data deflated by consumer price index) soared by 250%, compared to the much more modest UK average increase of 145%. Why did this boom happen? We offer three potential explanations:
Improvements in the NI economy – exemplified by relatively rapid growth in both employment and incomes between 1997 and 2007. Housing market may well have been over-compensating for an historic under-valuation of prices during almost three decades of civil unrest. Overspill from the credit and property bubble in the RoI at the peak of the boom in 2006-7, when there was rampant speculative investment, both corporate and private, fuelled by loose lending criteria.
Figure 7: Change in house prices (real) from 1997 Q3 to Q3 2007
…to the ‘bad’ times… Just as NI had an exaggerated and unsustainable property boom, outpacing every other UK region, so this was followed by a price collapse of 58% in real terms (as Figure 8 illustrates). So steep and sudden was this collapse that, in October 2012, the Council of Mortgage Lenders estimated that 35% of all mortgages advanced in NI since 2005 were in negative equity, compared to the UK average of 14%. We will live with that legacy of falling house prices for a long time to come.
Figure 8: Change in house prices (real) since Q3 2007 Northern Ireland
North East
Yorkshire and the Humber
North West
West East Midlands Midlands
Wales
South West
Scotland
East
South East
London
0.0%
-10.0%
-20.0%
-30.0% 300.0%
UK average = -18%
-40.0% 250.0%
UK UK average = 145%
200.0%
-50.0%
-60.0%
150.0%
-70.0%
100.0%
Source: ONS, deflated by CPI
50.0% 0.0% Northern Ireland
Wales
South West
East
East Midlands
London
North East South East
West Midlands
Yorkshire and the Humber
Scotland North West
Source: ONS, deflated by CPI
PwC 8
Northern Ireland Economic Outlook
What about future prospects? Despite the NI property ‘affordability index’ (defined as the ratio of average house price to average earnings) having fallen to 3.04, we do not anticipate a marked increase in NI house prices during the rest of this decade. Indeed, PwC estimates suggest that, all other things being equal, it could be at least a decade before NI property prices recover much of the ground lost in the period since 2007. The reasons for this lies in the balance of demand and supply side factors is, as follows:
Income growth: NI may be in slow recovery, and real incomes are expected to grow modestly so it will have a positive but weak impact on house prices; Population growth: NI population is forecast to grow by only 7% in 2011-23; Migration: This may remain about zero in the medium-term with a neutral effect on house prices; Household size: This fell from 2001 to 2011 and any further reduction will have a marginal positive effect on house prices; Credit: In the medium/long term, interest rates will increase, with a negative effect on house prices; New builds completed: recently slowed to only 7,000 p.a. or less whereas Regional Development Strategy reckoned on a “need” of 11,200; implying some upward pressure on prices.
What about policy interventions? A range of policies have been developed (mostly at the London level such as, Help to Buy, but only applying to NI to varying extents) attempting to support homeowners and buyers. The Executive continues to support Co-ownership (grant of £25m p.a.) involving over 700 properties annually.
As unemployment and repossessions, the macro drivers of housing stress, are not going away, the Department of Social Development (DSD) is targeting 4,600 new homes from the current budget period versus 5,500 for the prior three years. But with reduced capital budgets, this will translate into a reduction in capital from more than £90,000 per house to less than £60,000 of capital per house. While some building costs have fallen, such as labour and land but not materials, they have not fallen that far. And with gearing across the housing association sector now around 10 times EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation), there is not much room for stretching balance sheets any further. The implies a further pressure on social housing unless rental incomes can rise, or DSD and housing associations turn to the capital markets to fund the building of social housing. However, with more than 70% of NIHE and Housing Association tenants on Housing Benefit and the remainder receiving subsidised housing, there are clear issues of affordability facing the social housing sector that will also impact on the private rental sector. In the meantime, Northern Ireland has to find affordable/social housing for tenants in need of support. So what are our other options? Half of all properties in the NI private rented sector are rented by recipients of Housing Benefit – indeed there are more housing benefit recipients in the private rented sector than in social housing. Yet the provision of housing is often neither decent nor affordable and a number of housing bodies are exploring providing affordable products for the private (unregulated) housing sector. So, if tough times demand even tougher choices, the challenge is to develop creative options to deliver even better outcomes for tenants, social housing providers, the construction industry and ultimately government.
The private rented sector needs to work efficiently and equitably whilst reflecting the impact of welfare reform changes, particularly to housing benefit, as well as what may be a move towards renting as compared to owner occupation. NI’s social house building programme has delivered over 1,800 completions per annum in the four years following the global downturn, compared to an average of 1,300 in the four preceding years, explaining why Northern Ireland’s waiting lists and housing stress fell steadily over the last five years.
PwC 9
Northern Ireland Economic Outlook
PwC NI Economics team Dr. David Armstrong
Dr. Esmond Birnie
Partner
Chief Economist
[email protected] +44 (0) 28 9041 5716 +44 (0) 7713 680266
[email protected] +44 (0) 28 9041 5808 +44 (0) 7850 907892
Andrew Doherty
Martin Carey
Senior Economist
Economist
[email protected] +44 (0) 28 9041 5751 +44 (0) 7811 384688
[email protected] +44 (0) 28 9041 5839 +44 (0) 7892 690500
Dom Boyle
Dragos Mircea
Economist
Economist
[email protected] +44 (0) 28 9041 5687 +44 (0) 7813 903620
[email protected] +44 (0) 28 9041 5214
Media information John Compton Director of Corporate Affairs
[email protected] +44 (0) 28 9041 5663 +44 (0) 7799 346925
PwC 10
www.pwc.co.uk/ni
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