Tue 17th Oct 2017
Quarterly Economic Survey: Firms under pressure to raise prices
Pictured L-R are: Maureen O’Reilly (Economist for the QES); Brian Murphy (BDO) and Ann McGregor (NI Chamber).
An increasing number of Northern Ireland manufacturers and services sector businesses are coming under pressure to raise prices.
The shift is revealed in the latest Quarterly Economic Survey published today (17 October 2017) by the Northern Ireland Chamber of Commerce and Industry in association with business advisers BDO.
According to the Q3 2017 report, 49% of manufacturers – the highest across 12 UK regions – and 40% of services are expecting to raise prices in the next 3 months largely driven by rising costs.
Overall, the results show that the Northern Ireland economy continued to grow during the quarter although there were some signs of growth softening despite a positive performance in export markets.
Almost all key balances remained positive during Q3 with more businesses in manufacturing and services reporting increases in indicators such as sales, exports and employment than those reporting a fall.
Northern Ireland had one of the most negative reactions across the UK regions to the outcome of the EU referendum vote in Q3 2016. However, Northern Ireland’s regional position has recovered somewhat and in services 9 of the 14 key balances remain above the UK average in Q3. Manufacturing’s regional position weakened however during Q3 with 5 of the 14 key balances above the UK average (9 in Q2).
Manufacturing growth was sustained by a strong export performance during Q3. Northern Ireland had one of the strongest export balances across the 12 UK regions. Domestic (UK) sales and orders weakened however with Northern Ireland’s regional performance weakest for these balances. Employment expectations have been falling since the start of the year. Northern Ireland was one of only three UK regions reporting a negative cash flow balance meaning that more businesses reported a deterioration in their cash flow position over the last three months compared to those noting an improvement. Pressure from rising raw material costs remains high for local manufacturers.
There was a largely lacklustre performance by the services sector during Q3 although the sector still showed signs of growth. Key balances around domestic sales, exports and employment were largely unchanged. Both domestic and export sales balances were above the UK average but the order books for both markets are weaker. The cash flow position of the sector remained positive.
Business confidence has been dipping in both manufacturing and services in recent quarters although it still remains high by historic standards. A balance of +36% of manufacturers and +41% of services expect turnover to improve over the next 12 months. Confidence around profitability, although positive, is weaker in both sectors and in services has been falling since the end of 2016.
Manufacturers’ capital investment plans have showed continued signs of improvement during Q3. The balance is one of the highest across the UK regions. Investment intentions by the services sector however have been weakening over the last few quarters and capital investment plans by the sector are particularly weak by UK standards.
Exchange rates concerns re-emerged during Q3 2017. They had eased during Q2. In Q3 a total of 58% of members said that exchange rates were more of a concern than 3 months ago (39% in Q2). This figure was just 19% two years ago. Northern Ireland’s manufacturing and services sectors are more concerned about exchange rate pressures compared to any other UK region.
Recruitment and Skills
Recruitment intentions are still positive in both manufacturing and services in Q3 with 63% and 58% of members respectively trying to recruit over the last 3 months. Both sectors however continue to experience high levels of recruitment difficulties with 72% of manufacturers and 68% of services stating that they have had difficulties finding suitable staff (although this has eased for manufacturers compared to Q2 where it was 81%).
Members were asked if their business currently had any skills gaps. One in 2 members (48%) state that they are experiencing skills gaps. This is particularly marked among larger businesses with 58% of those employing 250+ experiencing gaps. The main actions taken by members to address these gaps include an increase in training activity/spend (51%), increased recruitment activity/spend (26%), more staff appraisals/performance reviews (25%) and more supervision of staff (24%).
Fifty-eight per cent of members have a training plan in place that specifies in advance the level and type of training needed over the coming year. Fifty-three per cent of members also have a budget in place which specifically covers training spend.
NI Chamber’s quarterly Brexit Watch focused on the role of workers from outside the UK and Ireland in member businesses and the impact, if any, on the recruitment and retention of these workers following the UK’s vote to leave the EU.
EU workers (outside the UK and Ireland) are important to the functioning of almost 1 in 2 member businesses. In fact, workers from other EU countries are ‘very important’ to 17% of businesses. They are of greatest importance to Northern Ireland’s largest businesses (250+ employees) and those in the hotel/catering and manufacturing sectors. One in 4 members also place importance on the role of workers from the rest of the world outside the EU to their businesses.
In the last three months, 14% of businesses have attempted to recruit EU migrant workers. Of these, two thirds (67%) consider that the recruitment of EU migrant workers is more difficult than just before the Brexit vote in June 2016. One in 4 businesses (23%) with EU migrant workers have had some issues retaining them over the last 3 months.
Commenting on the survey results, Ann McGregor, Chief Executive of NI Chamber, said:
“The uninspiring results we see in our third quarter findings reflect the fact that political uncertainty, the vagaries of the Brexit process and the resulting currency fall out are continuing to weigh on business growth prospects.
“The slump in sterling is pushing up sourcing costs for importers. Businesses are coming under increasing pressure to pass these costs onto customers at a time when their spending power is already squeezed.
“However, sterling’s weakness does have its benefits and we are seeing this in the competitive boost it has given our exporters, both in manufacturing and services.
“Businesses need support to boost their confidence at this critical time. Our politicians can offer them support but that will only come about with the restoration of the Executive. This must happen in the near future before more time is lost.”
Brian Murphy, Managing Partner at BDO Northern Ireland, said:
“Currency is of course only one factor impacting upon performance, but the latest quarterly economic survey indicates firms are responding to concerns with revised and realistic expectations of sustained or improved turnover and more modest profit margins.
“On balance that is not entirely unexpected. The relatively low value of sterling has enabled Northern Ireland’s manufacturing and services sectors to sustain growth in exports and sales, albeit a little more slowly in the last quarter. While that gain is now being offset by rising raw material costs and other pressures, businesses are still showing higher levels of confidence than would normally be seen during this time of year. The next few months may see rising prices and a squeeze on some sectors, but despite the challenges we remain well placed to ride out the turbulence.”