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A majority of companies expect wages in their firms to increase in the coming year but a significant number feel under pressure to do so in order to attract new staff.

That is just one of the findings published in the latest Quarterly Economic Survey published today (13 October 2015) by Northern Ireland Chamber of Commerce and Industry (NI Chamber) and business advisors BDO.

Almost 60% of businesses who were surveyed said they expected wages to rise over the next year ahead with 45% of companies feeling pressure to offer higher wages to attract new staff. Whilst the majority expect any wage increase to be under 2% (34%), 1 in 4 expect to make pay awards in the order of 2% plus.

Northern Ireland’s largest private business survey also reveals that there has been a loss of momentum in Northern Ireland’s economic recovery and although most key balances remain positive, indicating there is still some economic growth, that rate of growth appears to have slowed.

The deterioration in the performance of both manufacturing and services sectors in the home market stands out this quarter with 11 of the 14 key balances in manufacturing falling in Q3 along with 12 of the 14 key balances in services.

Manufacturing
It was a challenging quarter for Northern Ireland manufacturers with some large and mostly negative changes across key balances. Manufacturers’ domestic orders balance fell by 22 points to +10% (UK +18%) with more businesses finding sales in the domestic markets challenging. The balance of firms taking on staff over the last 3 months fell sharply and fewer expect to increase their workforce over the coming months. Cash flow is an on-going concern for Northern Ireland’s manufacturers and the region is one of only four across the UK where the balance is negative – meaning more manufacturers have seen their cash flow position deteriorate over the last 3 months than improve. Manufacturers are also coming under pressure to reduce prices. The prices balance dipped into negative territory this quarter (-9%).

Manufacturers’ export performance was more positive this quarter with export sales (+19%) and orders (+17%) balances rebounding significantly. The balances had both been negative in Q2 2015.

Services
A number of key service sector balances weakened this quarter and a number became negative. Northern Ireland had the weakest Q3 balance across the UK regions for domestic sales (+4%) and domestic orders (-4%). Export sales (-10%) and orders (-15%) balances also became negative. The performance of the service sector had been relatively positive in Q2 but confidence had been weakening.

Despite improvements in employment balances, the % of service firms trying to recruit fell from 91% in Q2 to 65% in Q3. However, for those trying to recruit the positions are more likely to be permanent positions.

Business Confidence
Investment intentions fell for both sectors this quarter, particularly around training. The manufacturing sector balance for training investment decreased by 27 points to +19%. The service sector balance for training investment decreased by 12 points to +16%. Turnover and profitability confidence fell for both sectors with particular concerns around profitability. Manufacturers’ confidence in Q3 that profitability will improve over the next 12 months fell sharply to +12% (Q2 +37%) and for services to +8% (Q2 +35%).

Competition is the main concern for firms (45%) followed closely by exchange rates (43%). Exchange rates are a much bigger concern for Northern Ireland members compared to members nationally (NI 43% vs. UK 18%).

The Living Wage

The survey also asked businesses for their view on the forthcoming introduction of the new National Living Wage meaning that by April 2016 all employees aged 25 or over will have to be paid a minimum of £7.20 per hour rising to over £9 an hour by 2020. Whilst the majority of businesses are in agreement with its introduction (64%), a significant minority (28%) are opposed to it. A further 8% of members are not sure. Most members (78%) state that they already pay a rate at or above the new National Living Wage. For those who do not, 7% say that they could afford to pay it while 15% say they cannot.

Commenting on the findings, Ann McGregor, Chief Executive of NI Chamber said:
“This quarter’s QES has not been particularly strong for Northern Ireland. There has been deterioration in most of the key balances across both manufacturing and services. It was good to see the manufacturing export balances return to positive
territory this quarter but the sector remains under pressure, a good indicator of which is the fact that its cash flow balance is still negative, where Northern Ireland is one of only four regions in the UK where this is the case.

“We had been seeing a particularly strong improvement in business performance within the domestic economy for Northern Ireland businesses but this appears to have stalled this quarter. Business confidence has also fallen back and concerns around profitability are particularly apparent in both sectors. Whilst most key balances remain positive this quarter, it appears that the momentum in Northern Ireland’s recovery has slowed.

“Businesses here appear compelled to raise wages in spite of the challenges they face. Whilst an increase in wages is good for the economy, it will however put pressure on companies’ profits and prices which may not be sustainable particularly for some sectors. Northern Ireland also has a higher share of micro businesses than the rest of the UK and it will be important to assess if they can afford to pay their employees more.”

Commenting on the National Living Wage, Ms. McGregor continued:
“Members have concerns about the introduction of the National Living Wage. They have been given little time to prepare for its introduction in April 2016 and assess the impact on recruitment intentions particularly around, for example, older apprentices aged 25 plus. There are also concerns around the implications on the cost of doing business and the knock on effects on international competitiveness. The view is that the policy has not been well enough thought through and potential impacts not adequately assessed.”

BDO Managing Partner Peter Burnside said the results are disappointing, but reflective of the precarious state of our economic recovery:
“The pace of economic recovery has slowed across the UK and this survey shows growth has slowed locally as well and that is disappointing. Our precarious recovery is typified by lower confidence on issues of turnover and profitability among NI businesses than throughout the UK.

“However there are some positives and more Northern Ireland businesses are reporting increases in local sales and employment than are reporting a fall while manufacturing export performance has improved although it is too early to see any trend emerge.

“It is important to take a long term view and we will continue to work with our clients businesses across all sectors to take advantage of growth opportunities where they emerge.”

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