Tue 18th Oct 2016
Quarterly Economic Survey: Brexit bruises business confidence and growth
Caption: Chris Morrow (Head of Policy at NI Chamber); Ann McGregor (Chief Executive of NI Chamber); Brian Murphy (Partner at BDO) and Maureen O’Reilly (Economist for the QES).
Uncertainty amongst businesses around growth prospects has further intensified following the UK’s vote to leave the EU.
That is one of the findings in the latest Quarterly Economic Survey published today (18 October 2016) by Northern Ireland Chamber of Commerce and Industry (NI Chamber) and business advisors BDO.
The Q3 2016 results suggest that whilst the Northern Ireland economy is still growing, albeit more slowly, confidence around turnover and particularly profitability has fallen, recruitment intentions are lower and investment intentions have taken a significant hit. On a more positive note, the weak pound has boosted manufacturing exports and the service sector continues to perform well in the local economy.
Following what had been a relatively positive performance in Q2, most key balances weakened during Q3 for both manufacturing and services. Ten of the 14 key manufacturing balances deteriorated over the 3-month period and 12 of the 14 in services.
Manufacturing export sales and orders improved in Q3 compared to Q2. The export sales balance increased from +7% in Q2 to +15% in Q3 with a similar improvement in exports orders (from +7% to +13%). Key export balances have been improving since the end of 2015. However, the manufacturing domestic (UK) sales balance (+4%) is at its lowest since Q1 2013 although orders have picked up slightly this quarter (+8% vs. Q2 +3%). Fewer manufacturers have or expect to expand their workforce. Around 2 in 5 are under pressure to raise prices driven largely by rising raw materials costs linked to higher import costs due to sterling’s devaluation.
The service sector performed well in the local (UK) economy during Q3 and the domestic sales balance ranks 1st across the UK regions (+25% vs. 9% UK). The sector did not however experience the same pick up in export sales and orders as with manufacturers. In fact, services export balances became negative during Q3 meaning that more service sector businesses experienced a decline in export sales and orders than those where exports grew. There was a large fall in the balances of services taking on staff in the last 3 months, down from +36% in Q2 to +9% in Q3.
Confidence around turnover and profitability growth fell in both sectors in Q3. Manufacturing confidence had been falling since the end of 2015 but fell more steeply this quarter, particularly around profitability. Service sector confidence had been improving over the last few quarters but also fell in Q3, again with greater concerns around profitability relative to turnover. The balance of service sector firms expecting profitability to improve over the next 12 months fell from +27% in Q2 to +7% in Q3, to levels last seen towards the end of 2012.
Exchange rates now dominate member concerns. In Q3 2016, 53% of members said that exchange rates were more of a concern than 3 months ago (41% in Q2). Exchange rates have been a growing concern over the last two years, impacting on more than twice as many members in Q3 2016 compared to Q3 2014 (24%). Fewer members are concerned with competition this quarter (34% vs. Q2 46%).
NI Chamber’s new quarterly Brexit Watch focuses on how the process of the UK leaving the EU is impacting on member businesses in key areas of confidence, investment and business growth. The first Brexit Watch findings reveal that:
- A core of around one third of members have scaled back growth and local investment plans because of the EU vote although there are businesses seeking to grow and looking outside Northern Ireland to invest.
- One in 3 members have scaled back or put business growth plans on hold as a result of Brexit. A similar proportion (31%) have scaled back/put on hold investment plans within Northern Ireland.
- In addition, some 25% of members have scaled back/put on hold local recruitment plans.
- There are some businesses planning to boost business growth plans (14%) as a result of the EU vote and 18% are planning to expand investment outside Northern Ireland.
- 1 in 5 businesses have stated that turnover has fallen because of the EU referendum result whilst just over 2 in 5 believe that costs have subsequently risen, particularly raw material costs for manufacturers.
- It has been a more mixed response for exporters with 11% seeing a boost to exports while for 10% exports have fallen.
- The outcome of the EU referendum has had limited impact on jobs, both national and non-national, as yet.
Funding public expenditure
Businesses were asked if the NI Executive were to consider ways to raise additional monies to fund public expenditure in Northern Ireland, what should be considered/explored. Just over one third of members believe that the Executive should consider further devolution of fiscal/tax raising powers (36%) such as stamp duties, income tax and air passenger duty (short haul flights). This is followed by the introduction of water charges to households (31%). Other considerations are the removal of all/some business reliefs/exemptions (23%), the introduction of toll/road user charges (22%) and the removal/reduction of subsidies to public transport (19%). Members were least supportive of any increase in university student fees (11%).
Commenting on the survey, Ann McGregor, Chief Executive of NI Chamber, said:
“This quarter’s survey shows that Q3 2016 has been particularly challenging for businesses and growth appears to have slowed since the EU referendum.
“Although it is important not to take one quarter’s figures in isolation, the outcome of EU referendum vote, the continued uncertainty surrounding it and the sterling’s response through depreciation, has had a tangible impact on business growth and sentiment.
“Sterling’s devaluation is a particular concern for members. It has provided a welcome boost to exporters but it is putting significant pressure on costs, particularly for local manufacturers. This will impact on businesses bottom line and we are already starting to see members’ confidence around profitability particularly being eroded. It is only a matter of time before this will start putting upward pressure on prices.
“Our members consider retaining freedom of movement of goods, services, capital and people within the EU as a top priority. Whatever terms are negotiated with the EU it is crucial that tariff and non-tariff barriers are minimised, the skills of existing EU workers can be retained and businesses in Northern Ireland are able to attract EU-27 nationals to meet future skills needs with minimal bureaucracy, costs or barriers.”
Brian Murphy, Partner at BDO, said:
“It is welcome to see some growth in the economy since the referendum result, although it is notable that this has been at a slower rate than previously. The results of the survey show that many businesses are adopting a more cautious, ‘wait and see’ approach following the referendum result.
“Clearly the uncertainty surrounding Brexit is having an impact on business confidence in the local market, with many putting planned expansion and recruitment on hold. This is an understandable reaction to a very unique situation. However, it is reassuring that some remain optimistic and confident about the future growth of their business in the medium to longer term, once it becomes clear what Brexit will look like. It is also encouraging that businesses are talking about maintaining staffing levels, rather than reducing them.
“Given Northern Ireland’s unique status as the only part of the UK that shares a land border with the Eurozone, it is also clear that there have been benefits for many local businesses who have been able to capitalise on the strength of the Euro against the pound in recent months and it will be interesting to see what impact this will have for local traders over the next quarter.”