Danske: NI's economic recovery underway but rising COVID-19 cases and Brexit pose risks

  • Northern Ireland’s economy will shrink by around 11% in 2020, and then grow by about 7% in 2021, with the Brexit transition period possibly holding back recovery, Danske Bank forecasts.

    Rising numbers of Covid-19 cases could also slow down the gradual return of economic activity.

    Speaking about the bank’s latest Northern Ireland Quarterly Sectoral Forecasts report, its chief economist, Conor Lambe said now that “most of the initial gains from re-opening the economy after lockdown are now behind us and with recent rises in the number of Covid-19 cases and the need for tougher restrictions to be imposed, we expect economic growth rates to begin to moderate in the final quarter of the year.”

    He added: “We continue to believe that the UK and the EU will agree and implement the terms of a new free trade deal from January 2021, at which point the Northern Ireland Protocol will also take effect. However, some trade frictions are still likely to be introduced when the transition period ends.

    “It is clear that there are a number of headwinds facing the local economy and despite our relatively strong annual growth forecast for next year, economic output is still expected to be around 3 – 4% below its pre-coronavirus level in the final quarter of 2021.”

    Sector outlook

    With the exception of public administration and defence, all sectors are expected to contract this year, yet industries such as professional, scientific and technical services and information & communication, where people and businesses have been able to adapt to remote working, are expected to experience relatively smaller falls in activity.

    The accommodation and food services sector is still edging out of lockdown, but Danske Bank estimates that it will experience the largest annual output fall of any sector, of around 37% in 2020.

    The hospitality sector is expected to have the largest annual output fall

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    This is followed by arts, entertainment and recreation, another sector in which the recovery is likely to be constrained given the need for continued social distancing measures. Danske Bank expects activity in this sector to decline by approximately 26% in 2020.

    The wholesale and retail trade sector has also faced challenges and is expected to have an annual fall in output of 11.1%. The sector has not been as impacted as the other consumer-focused sectors as the shift to online shopping, continued purchases of essential items and the pickup in household spending during the summer months have all provided some support to businesses.

    Manufacturing (-10.8%) and construction (-16.9%) are expected to experience large falls in output this year while the closure of schools and education facilities during the lockdown period is expected to lead to a sharp contraction of 19.8% in the education sector.   

    Labour market outlook

    Danske Bank predicts the labour market to weaken over the remainder of 2020 and is projecting that the annual number of employee jobs will fall by around 1.3% in 2020 and by a further 2.8% in 2021.

    Given the data for the first half of the year, several sectors are now expected to experience an increase in the average number of jobs in 2020. This includes the electricity, gas, steam and air sector, the professional, scientific and technical services sector, and the water supply industry, all of which experienced increases in employment between 2019 Q4 and 2020 Q2, and are now expected to see annual jobs growth this year.

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    Despite the policy measures put in place by the Government to try to minimise redundancies, the bank still believes there will be significant job losses in the consumer-focused sectors in 2020. Accommodation & food services and arts, entertainment & recreation are forecast to experience contractions in employment of 8.3% and 5.9% respectively. Similarly, wholesale & retail trade and manufacturing are also set to experience job losses this year.

    The outlook for 2021 is more pessimistic and, in annual average terms, all sectors are forecast to see a reduction in the number of jobs. The consumer-focused sectors are again expected to experience some of the biggest losses.

    Risks and uncertainties

    The coronavirus pandemic remains the most significant risk facing the economy. The recent increase in the number of Covid-19 cases has already resulted in the introduction of new restrictions which could dampen activity, particularly in consumer-focused sectors.

    In addition, the rise in the spread of the virus could lead to even greater changes in consumer and business behaviours towards more precautionary spending habits than assumed in the forecasts, which would serve to further constrain the pace of recovery in consumer spending and business investment.

    Negotiations on the future relationship between the UK and the EU are ongoing, with a deal needing to be agreed and ratified before the transition period ends on 31 December 2020.

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    From a local perspective, the Northern Ireland Protocol will become operational from the beginning of next year but there is still a lack of clarity around how it will be implemented and the impact that it will have on goods trade between Great Britain and Northern Ireland.

    If the UK and the EU are not able to agree a deal, then the implementation of the Protocol will likely be more stringent. In such a ‘no trade deal’ Brexit scenario, it is expected that the pace of economic recovery in both Northern Ireland and the wider UK would be slower. 

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