Quarterly Economic Survey: Functional Executive key to business growth

–          Establishing a fully functional Executive key to driving business growth says NI Chamber members

–          Investment intentions remain weak in wake of Brexit with 1 in 3 scaling down or putting plans on hold

–          Rising raw material costs cited as the key pressure to increase prices

–          Two-thirds of businesses recruiting – but face major challenges finding suitable candidates

Establishing a fully functioning Executive is the key to driving business growth, businesses in Northern Ireland have said.

The latest Quarterly Economic Survey (QES) published today (25 April 2017) by Northern Ireland Chamber of Commerce and Industry (NI Chamber) and business advisors BDO, reveals that firms here believe a stable and working government is essential to drive growth.  This, they say, along with no hard border with the Republic of Ireland as a result of Brexit and a lower Corporation Tax rate, should be the key priorities of any future NI Executive in supporting business and the wider economic growth in Northern Ireland.

Whilst the findings indicate that business growth is steady, investment intentions remain weak in the wake of Brexit with almost 1 in 3 putting business growth plans on hold.

Businesses are also continuing to feel inflationary pressures, with manufacturers reporting rising raw material costs as the key pressure on prices – at its highest since Q4 2011. Firms are however trying to make efficiency savings rather than passing these costs on to customers. Also, despite increasing recruitment intentions, more than two-thirds of businesses are experiencing recruitment difficulties.

Manufacturing & Services sectors

• The manufacturing sector’s domestic (UK) sales balance continued to improve and the orders balance moved from negative to positive for Q1. However the sector has not had the same pick up in export sales as some other UK regions and its export order book remains weak. More manufacturers have taken on staff in the last 3 months and are continuing to expand their workforce.
• The service sector’s performance for Q1 2017 was not as strong as Q4 2016, but held steady. The domestic and export sales balances remain relatively strong on previous performances. Employment balances remain positive.
• Business confidence is holding up in both the manufacturing and services sectors. Confidence is particularly strong around turnover with a balance of +46% in manufacturing and +47% in services reporting that they expect their turnover to improve over the next 12 months.

Business pressures

Members were asked what pressure, if any, they expected a range of costs to have on their business over the next 12 months. Costs included imports, raw materials, energy, property and employment related costs.

• Businesses are feeling strongest pressure from rising import and raw materials costs, particularly local manufacturers, with Northern Ireland ranking 2^nd highest across the UK regions on this measure.  This is impacting on around 60% of businesses with half of those feeling the pressure strongly.  The wider business population anticipate some pressure from rising energy and property costs over the next 12 months.
• Auto enrolment pension costs are the main employment related cost concern with 46% of businesses expecting some pressure and 18% expecting strong pressure from this cost over the next 12 months.
• Some 70% of businesses are expecting to award pay increases in 2017.  35% expect average gross wages in their business to rise by 2% or more in the next year (up from 24% in 2016).
• Inflation is a more pressing concern generally with 31% of members in Q1 citing it as a key concern.  In Q3 2016 this was just 13%.

Recruitment

• Recruitment intentions are still relatively strong for both sectors in Q1 2017 with around two-thirds of members in each sector trying to recruit new staff over the last 3 months.
• However, both manufacturing and services are experiencing significant recruitment difficulties with 75% of manufacturers and 65% of services stating that they have had difficulties finding suitable staff, particularly professional/managerial staff and skilled trades for manufacturers.

Brexit

The third Quarterly Economic Survey Brexit Watch findings would suggest that a core of businesses continue to feel an immediate impact from the UK’s vote to leave the EU.

• The most significant impact is around costs with almost 1 in 2 businesses experiencing an increase in costs this quarter due to sterling’s devaluation, particularly rising raw material costs for manufacturers.
• Around 20% of businesses have stated that turnover has fallen because of the result although for 10% turnover has actually increased.
• It has been a more mixed response for exports with 12% of businesses seeing a boost to exports due to Brexit while for 11% exports have fallen.
• Brexit has had a largely negative effect on business growth and local investment plans.  Almost 1 in 3 members have scaled back/put on hold business growth plans.
• Twenty-seven per cent have scaled back/put on hold investment and recruitment plans within Northern Ireland.
• However, some businesses are planning to boost business growth plans (12%) as a result of the EU vote and 15% are planning to expand investment outside Northern Ireland.

Support to help the NI economy grow

The survey also found that the three main priorities that businesses consider key in order to grow their business/the NI economy are: a functioning Executive; no hard border with the Republic of Ireland as a result of Brexit, and a lower Corporation Tax rate in Northern Ireland.Other important actions include a freeze/reduction in business rates, greater investment in infrastructure, addressing issues around government procurement, tackling rising energy costs and better support for exporters.

Commenting on the overall survey results, Christopher Morrow, Head of Policy at NI Chamber, said: “In the here and now, many businesses are resilient and experiencing solid growth. However we do not know how long this will continue, especially in light of the current political situation in Northern Ireland. Businesses do not like the current uncertainty caused by the lack of an Executive – especially given uncertainties already created through Brexit and the Prime Minister’s decision to call a General Election in June.

“The rise in inflation seen since last year’s EU referendum is the biggest immediate pressure facing most firms. Whilst manufacturers have enjoyed a good quarter, they are facing higher costs at the factory gates, which increasingly translates into companies having to raise their own prices. With inflation already above the Bank of England’s target, this squeeze on business looks set to continue in the medium term.

“The myriad of upfront costs imposed by government – including business rates, Apprenticeship Levy, National Living Wage and Auto enrolment – are all adding to the overhead costs of firms and the pressure on prices.

“Overall, the survey demonstrates the fact that there are longstanding structural issues here at home that we need to tackle to sustain success in the future. The competitiveness of firms depends on a fully functioning NI Executive, with a bold domestic economic policy, and a good Brexit deal.”

Brian Murphy, Partner at BDO, said: “The first quarter of 2017 has presented new challenges in the local economy, yet business growth has remained consistent and steady across the manufacturing and services sectors. The latest results show that companies are maintaining their positive momentum from last year and there is a healthy confidence particularly when it comes to recruitment and remuneration.

“In the last three months, around two-thirds of businesses surveyed were actively recruiting – mainly for full-time and permanent roles – and more than 70% reported plans to award pay increases in the year ahead. While that is good news, some have encountered difficulty in finding suitable staff, pointing to skill shortages.

“Furthermore, inflation has been accelerating in recent months and is a considerable risk to the UK’s growth prospects as businesses face rising costs and pressure to raise prices. Continued inflationary pressure results in consumers paying more, from the petrol pumps to the check-out tills. Therefore, many businesses who are planning to award pay increases in the year head may in fact find that the value of paycheques may be less.

“Across the Board, a functioning Executive was identified as a critical priority to support business growth in Northern Ireland; alongside a reduction in corporation tax and avoiding a hard border with Ireland. Businesses have adapted to a changing environment, but need certainty on these core issues if they are to maximise jobs and growth potential.”

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