Economic survey confirms stark impact of COVID-19 and Brexit uncertainty on NI businesses

6th Oct 2020

• Some signs of recovery but all key business indicators remain negative
• Order books remain weak, particularly for export orders
• Collapse in confidence leads to significant contraction in investment intentions
• 1 in 2 members already have or plan to reduce staff
• 1 in 5 members express concern about ability to pay back COVID-19 loans
• Only 7% believe they understand future trade arrangements between NI/GB

The latest Q3 2020 Quarterly Economic Survey (QES) published today (6 October 2020) by Northern Ireland Chamber of Commerce and Industry (NI Chamber) and BDO NI highlights that there has been some recovery in business activity after the severe collapse experienced in Quarter 2. However, all key business indicators remain negative in Q3, meaning that there are still more businesses in Northern Ireland reporting worsening business conditions than those reporting any improvement. Key business indicators remain significantly weaker than before the pandemic struck.

Impact of COVID-19
The fall out on staffing for members from COVID-19 continues to be significant. While the Job Retention Scheme has been a major support to local businesses (accessed by three in four members), one in two have or plan to reduce staff while around one third already have or plan to reduce working hours.16% have already or plan to reduce average pay.

The survey also gives an insight into current levels of business indebtedness and the ability to pay back loans:

  • 29% of members surveyed have accessed a loan scheme and 25% have obtained a cash grant
  • 51% of members are very confident they can pay the loan back and 29% are fairly confident
  • However, one in five members have concerns about their ability to pay back COVID-19 loans, including the Bounce Back Loan and Coronavirus Business Interruption Loan Scheme (CBILS)

Brexit Watch
With less than three months left until the transition period ends and new trading rules come into place, just two in five members (39%) are currently making preparations for Brexit. This compares to 60% in Q1 2020, clearly demonstrating how COVID-19 has negatively impacted on business preparedness.

The results indicate that understanding about what happens next with trading arrangements is very limited. There is particular confusion around the Northern Ireland/Great Britain trading relationship going forward.

  •  7% of respondents believe they understand what will happen with trading arrangements to/from Great Britain after the transition
  • 18% believe they understand what will happen with trading arrangements to/from locations outside the UK post Brexit
  • 80% believe that a ‘grace period’ of 12 months or more is needed after transition to allow businesses to prepare
  • Some 73% are concerned that there will be ‘No Deal’. This is up significantly on Q1 2020 when the figure was 40%

The Q3 2020 survey found than 71% of members believe they meet guidance to access the UK government’s new Trader Support Service. However, only 1 in 3 (31%) have heard of the TSS and to date, 12% have signed up to it.

Confidence and cash flow
Such challenging trading conditions mean that more businesses believe turnover and profitability will contract in the next 12 months than those believing they will grow. These key balances around confidence remain negative for both manufacturing and services sectors.

This collapse in confidence has fed into a significant contraction in the share of members intending to invest in their business. In Q3 2020 the balance of businesses intending to invest in plant and machinery was -32% in manufacturing and -45% in services, although these balances are up on Q2.

Cash flow, a key indicator of business health, is typically one of the weakest key indicators in the Northern Ireland QES. The balance of businesses reporting an improving cash flow position was already negative going into the COVID-19 crisis. The balances did fall further during Q2 2020 when many businesses had to close. In Q3, the cash flow balances for both manufacturing and services improved, but remain negative (-32% in manufacturing and -28% in services.).

Commenting on the findings, Ann McGregor, Chief Executive of NI Chamber, said:

“The QES is one of the largest surveys of its kind in Northern Ireland and the UK, so today’s findings give a very important insight into current trading conditions.

“Previous QES findings told us that Northern Ireland’s economy entered the COVID-19 crisis in an already fragile state. Today’s report confirms that while many indicators have improved when compared to Q2 they remain negative, which tells us that business conditions among many local businesses continue to worsen.

“Sectoral analysis of the survey findings suggests that manufacturing performance is showing some signs of improvement. Around half of the deterioration in manufacturing domestic sales and orders balances was recovered during Q3 and the share of manufacturers operating at full capacity increased to 30%. However, the sector’s order book remains weak, particularly in terms of export orders over the coming months. Not surprisingly, businesses in the service sector remain most negatively impacted, with consumer-facing firms particularly exposed.

“Some businesses have performed well/reasonably during the pandemic (37%) but the majority have been negatively impacted (62%) with many seeing little to no signs of improvement in trading conditions (43%). This emphasises the need for continued targeted intervention by government to support the many great businesses in Northern Ireland to survive this unnatural crisis in our economy.

“Our members are expressing growing concern about the looming prospect of a no-deal Brexit, which would be detrimental for businesses already dealing with the fall out of the deepest economic recession on record. It is clear that there is an urgent need to dramatically improve understanding of future trading arrangements with rest of the UK and increase awareness and uptake of the Trader Support Service. Any business in Northern Ireland which currently moves goods between Great Britain and Northern Ireland, or brings goods into Northern Ireland from outside the UK should sign-up for the TSS service without delay.”

Brian Murphy, Managing Partner, BDO NI, added:

“We cannot avoid the fact that every economic indicator is down from last year, with COVID-19 impacting many sectors in a way we have never seen before. While we are in the midst of this ongoing crisis, it is important to remember that it is not driven by market failure, instead it is driven by the pandemic. The business community has shown its resilience to the challenges it is facing, and it is now encouraging to see that these Q3 results have shown a clear move towards recovery.

“However, with the majority of businesses (62%) demonstrating an ongoing negative impact to operations and 2 in 5 seeing little to no signs of improvement (43%), there is a long road ahead for many. Of those businesses negatively impacted at the outset of the pandemic, some have recorded positive signs of improvement (19%), while a further 30% have seen at least small signs of improvement.

“As the furlough scheme ends though, and even with the new support scheme announced by the UK Government, many jobs are still at risk. Since the previous QES results, 30% of firms have already reduced their staff with a further 20% planning for reductions. It is vital that the NI Executive recognises the gaps in support mechanisms for some and addresses these urgently.

“Although Brexit has taken a back seat, it is still very much a critical consideration – pre COVID-19 we saw more than 60% of businesses planning for Brexit but as expected, the pandemic has taken over and only 39% have been able to continue this effort. Concerns of a ‘No Deal’ exit as well as the uncertainty with regards to trading arrangements is still very much a concern for many businesses.

“As we enter this new phase it is so important that businesses are afforded both flexibility and support to allow them to plan for their long-term sustainability. Businesses in turn, recognise the need for adaptability, rethinking their current position to ensure they are best placed to maximise opportunities in what will be changing markets, trading circumstances and demands”.

Download the report in full here.