While the state of the economy has been a common topic of conversation for some time, the talk lately has been of recovery and growth, but is there any reason for optimism? We asked economist, Richard Ramsey for his assessment of the situation locally, particularly in relation to the retail and food sectors…

Over the last three years, we have become all too familiar with a steady stream of negative economic news flow. In the main, the collateral damage stemming from the recession has given rise to two main groups – ‘losers’ and ‘big losers’. The latter category has been dominated by the construction industry and those sectors linked to the property market. For example, the construction sector has already lost one quarter of its workforce in just two years, with further significant job losses anticipated in the year ahead.

When the official output indices for construction, production (predominantly manufacturing) and private services sectors are combined into a single index, which acts as an indicator of private sector output, it’s clear that Northern Ireland’s private sector downturn began in Q3 2007. This measure excludes just two areas of the economy, the agriculture and public sectors.

Following nine consecutive quarters of falling output, Northern Ireland’s private sector finally returned to modest growth in the fourth quarter of 2009. Whilst this return to growth is welcomed news, getting back to the pre-downturn economy will be a challenge. It is noted that private sector activity still remains some 11 per cent below its 2007 Q2 peak, which takes output back to 2004 levels.

To date, the biggest casualty is the property intensive business services and finance sector (which includes advertising, banking, finance, consultancy, estate agency and legal services). This sector has witnessed a staggering peak to trough fall of more than 40 per cent. Meanwhile, the local engineering sector has experienced a drop in output of one third, from its recent peak, taking activity back to levels last seen in 1995.

But not all sectors have suffered. The agriculture sector, alongside the wider agri-food sector, has been one of the few sectors of the economy to record positive growth and is currently experiencing higher levels of output relative to Q2 2007, when the slowdown and subsequent downturn began. It is also interesting to note that even though 2007 was characterised as the year of the property boom, it was actually the agriculture sector that recorded the strongest rate of growth (+20 per cent) of all sectors. This compared to a real growth rate of 2.5 per cent for the Northern Irish economy as a whole.

Turning to last year, total income from farming is estimated to have risen by over 5% in real terms. Conversely; the services, manufacturing and construction sectors all recorded a marked fall in both activity and profitability in 2009. Overall, NI’s economy is estimated to have contracted by 4.5%.

Agriculture’s stellar performance is also evident in the labour market. To date, it has been one of the few areas, outside of the public sector, not to shed jobs over the two years to December 2009.

Food and drink

According to the latest figures for Q4 2009, output within the food, drink and tobacco sector is almost nine per cent higher than in Q2 2007. This compares with a six per cent decline over the same period for the UK.

The chemicals and chemical products (pharmaceuticals) category is another sector which has seen a rise in output of almost 20 per cent during the downturn. Against this backdrop you would be forgiven for thinking that Northern Ireland was trying to eat, drink, smoke and take drugs to get through the recession. The reality, however, is somewhat different. Traditionally, the pharmaceuticals sector, alongside utilities (electricity, gas and water), are recession-proof industries that tend to be immune from fluctuating levels of demand. Furthermore, Northern Ireland has a number of successful pharmaceutical firms (e.g. Almac, Randox and Norbrook Laboratories) that have been expanding over the course of the wider downturn.

Meanwhile, our food and drink sector’s out-performance, relative to the UK, has largely been an exchange rate story. Sterling’s weakness relative to the euro greatly enhanced the competitiveness of local food producers, particularly in relation to their RoI counterparts. As a result, the province’s producers have been able to displace RoI producers in the Republic’s largest market – Great Britain.

Within the local services industry, the wholesale and retail distribution sector also recorded higher levels of activity in Q4 2009 relative to Q2 2007. Once again, this was partly driven by the depreciation of sterling against the euro. This factor combined with the temporary reduction in the UK VAT rate from 17.5 per cent to 15 per cent alongside historically higher prices in the RoI, triggered a break for the border by southern shoppers.

However, the exchange rate advantage has recently gone into reverse and the RoI’s deepest recession on record has fuelled wide scale price competition. As a result, maintaining existing levels of business in both the food and drink and retail sectors will be the main challenge in 2010 rather than securing new growth. We anticipate €/£ to reach 80p (£ = €1.25) later this year. It has already become clear that the flow of cross-border shoppers has significantly subsided and this trend is set to continue.

The key threats to the economy at both a national and regional level are the necessary cuts in public expenditure and tax rises. The shape of which will emerge in the coming months. One anticipated tax rise, which will impact on Northern Ireland’s retail sector, is the anticipated rise in UK VAT from 17.5 per cent. The current EU average is 20 per cent so a rise of two percentage points to 19.5 per cent would still enable the UK to claim that its increased rate was still below the EU average. It should be remembered that groceries are currently exempt from VAT, so any plans to extend the coverage of VAT, even to a lower rate, will be closely watched.

Clearly, all sectors of the local economy face significant challenges in the months ahead and the economy will have to get used to higher levels of unemployment, rising taxes and costs. That said, those firms in the food, drink and general grocery trade can take heart that no matter how difficult the challenges are, we all need to eat and drink. These areas of the economy will remain some of the most recession proof parts of the economy.

Richard Ramsey is chief economist with the Ulster Bank in Northern Ireland.

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