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HIGH INFLATION, LOW CONSUMER CONFIDENCE AND TIGHTER MONETARY POLICY MEANS NORTHERN IRELAND IS LIKELY TO EXPERIENCE A RECESSION

Posted By:
Danske Bank

13th Dec 2022

Northern Ireland’s economy is likely to experience a period of recession as a result of a combination of factors including high inflation, low consumer confidence and tighter monetary policy, according to the latest forecasts from Danske Bank.

In its latest Northern Ireland Quarterly Sectoral Forecasts report, the Bank is forecasting that the Northern Ireland economy will grow by around 4.0% in 2022, which reflects an element of recovery from the impacts of the coronavirus pandemic.

But the Bank has revised its previous forecast of a 0.5% annual fall in economic activity in 2023 downwards and now expects output to contract by about 1.0% next year.

Danske Bank Chief Economist, Conor Lambe, said:

“The UK economy contracted in the third quarter of 2022 and we think that economic activity in Northern Ireland is also likely to have declined. Output is then projected to fall further in the final quarter of the year and through most of next year with both economies experiencing a period of recession as a number of factors adversely impact activity levels.

“Inflation is expected to decline gradually during 2023 but remain elevated and weigh down on household purchasing power. Consumer confidence is also particularly low and monetary policy is tightening. Looking forward, and while noting the considerable uncertainty around the outlook, we expect annual output in Northern Ireland to decline by around one percent next year.”

SECTOR OUTLOOK

Danske Bank is forecasting that the wholesale & retail trade sector will experience the deepest contraction of around 4.5% next year, after experiencing an expected fall in output of around 2.2% in 2022.

Other consumer-focused sectors including accommodation & food services and arts, entertainment & recreation are also projected to experience falls in output in 2023 following very strong rates of growth in 2022 as annual output recovered from the impacts of the pandemic. Activity levels are forecast to decline by around 3.9% and 3.8% respectively in the two sectors in 2023.

The Bank is also projecting that the manufacturing sector will grow by around 2.1% this year before experiencing a decline in output of about 1.1% next year. Output in the construction sector is forecast to fall by 1.0% next year, following expected growth of about 3.0% this year.

The information & communication and professional, scientific & technical services sectors are forecast to grow slightly next year, by 0.1%. Education and administrative & support services are among the other sectors forecast to avoid a decline in annual output in 2023.

LABOUR MARKET OUTLOOK

Danske Bank expects the annual average number of employee jobs to increase by around 2.7% in 2022. However, with annual economic output expected to decline in 2023, the Bank is projecting that the average number of jobs will fall by around 1.0% next year.

The Bank is also forecasting that the unemployment rate in Northern Ireland will average around 2.9% in 2022, before increasing to an annual average of 3.9% in 2023 as employment levels decline.

Employment in the wholesale & retail trade sector is projected to decline by around 2.6% in 2023. For the arts, entertainment & recreation sector, employee jobs are projected to reduce by 2.0%, following expected growth of 2.4% in 2022. The number of jobs in the accommodation & food services sector is also expected to decline in 2023, by around 1.7%.

The manufacturing sector is forecast to experience a decline in the number of jobs of around 2.2% in 2023, after projected growth of 1.9% in 2022. In addition, the administrative & support services sector is also expected to experience a contraction of 1.7% in employment in 2023.

With less reliance on consumer spending, the information & communication and professional, scientific & technical services sectors are expected to experience the strongest rates of jobs growth next year with annual employment projected to rise by 1.3% and 1.0% respectively in 2023.

RISKS AND UNCERTAINTIES

While there is always uncertainty around economic forecasts, Danske Bank said the extent of the risks and uncertainties around these projections is considered to be more elevated than is normally the case.

Conor Lambe said:

“One of the risks that could impact the economy going forward is persistent inflation. Inflation in the UK is at a multi-decade high and while we think it will peak in the final quarter of 2022, the decline back towards its 2% target is likely to be gradual. We are projecting that inflation will average around 7.5% in 2023 but if it were to decline more slowly than anticipated and run higher than forecast, inflation has the potential to constrain economic activity even further.”