Northern Ireland’s economy is expected to shrink by around 7.5% this year due to the coronavirus pandemic’s impact, but could see a 5% growth in 2021, according to Danske Bank.
The bank’s latest Northern Ireland Quarterly Sectoral Forecasts report said restrictions on people’s movement will lead to lower consumer spending and business investment drops, as firms face cash flow and revenue challenges.
This is based on the assumption that the current lockdown remains in place until somewhere between the end of May and the middle of June before gradually being lifted, with some social distancing measures expected to remain in place for longer.
Danske does predict however, that activity will begin to gradually recover in the later quarters of 2020.
Chief economist Conor Lambe said: “It is important to say that, despite the expected return to positive annual growth rates from 2021, total economic output may not return to its pre-coronavirus level until late in 2022 or into 2023. In addition, these forecasts are provided in a climate of extremely high uncertainty and the risks around our numbers are weighted to the downside.”
Sector outlook
As a direct result of the lockdown measures, Danske expects sectors to be hit the hardest this year will be hospitality and food, arts, entertainment and recreation, and education.
The wholesale and retail trade sector has also seen a sharp activity fall in recent weeks and Danske Bank is forecasting that the sector will experience an annual fall in output of 8.5% in 2020.
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Both manufacturing and construction are expected to experience sharp declines in output, with falls of around 12.0% and 7.7% this year respectively.
Extensive shutdowns, in addition to steep falls in orders, are impacting both sectors. Given the global nature of this pandemic, there is a risk that supply chain issues may impact their recovery.
Labour market outlook
Danske expects policy measures - such as the Coronavirus Job Retention Scheme - should help to limit the number of job losses as a result of the pandemic, but still expects the number of employee jobs to decline by around 2.3% in 2020.
The annual unemployment rate is expected to increase to around 5.0%, though it is likely to reach higher levels in the second and third quarters of this year.
The bank does anticipate to see some recovery in the labour market in 2021 with the number of jobs rising by 1.2% and unemployment coming down to about 4.5%.
The public sector has the strongest forecast for employee jobs growth this year, with human health and social work, public administration and defence likely to see increased demand in the short-term to provide additional public services during the pandemic.
Danske envisages employment decline in business services, in sectors such as ICT, professional, scientific and technical services, and administration and support facilities.
These sectors are believed to see job losses, but at a less sharp decline than the average for the overall economy.
Risks and uncertainties
The coronavirus pandemic is currently the most significant issue facing the economy, with a number of associated risks emerging.
For example, it is possible that aggregate demand in the economy will not recover as quickly as the bank expects and that financial conditions tighten further, both of which would limit the extent of the recovery in economic activity. This could happen if a large number of firms go out of business and there is an even higher than expected rise in unemployment.
There is also the risk of lockdown measures continuing into the second half of 2020 or having to be reinstated.
In addition, the effects of the lockdown could lead to even greater changes in consumer and business behaviour towards more precautionary spending habits than that assumed, which would mean it would take a longer period of time to return to the spending and investment levels seen prior to the pandemic.
Brexit also remains on the agenda, with the UK having formally left the EU on 31 January 2020 and the transition period only in place until the end of this year. Negotiations on a future trading relationship are continuing but disruption caused by the coronavirus pandemic mean that concluding a deal by the end of this year is now even more challenging.
If an agreement is not reached in time and the transition period is not extended, Danske added that then economic output will be even lower than currently forecast.
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Source: Written from press release
