Report: Northern Ireland’s economy ‘stuck in second gear’

As we enter the new year, economists at Ulster University reveal that Northern Ireland’s economic outlook is stuck in second gear, as forecasts show subdued growth this year before increasing in 2025.

Launching their Winter 2024 Outlook, the Economic Policy Centre hosted an event at the Ulster University Belfast campus to highlight the economic forecasts for 2024 and beyond covering topics on interest rates, inflation, unemployment and sectoral jobs growth for Northern Ireland.

Highlighting a forecasted growth of just 0.8% in 2024 and 1.1% next year for Northern Ireland, which reflects similar economic conditions across the UK and Europe as higher interest rates continue to impact the economy.

Gareth Hetherington, director of the Ulster University Economic Policy Centre, said: “The focus on whether the economy either avoids or falls into a recession somewhat misses the point. In practice the difference between either outcome will be a few tenths of a percentage point in growth. The bigger problem is the prolonged period of low growth and the lack of policy focus to correct this.

“This issue is not restricted to Northern Ireland and explains why after more than a decade of downward pressure on government spending alongside an increasing tax burden, government debts and deficits remain a significant problem.”

Where now for interest rates?

The UUEPC is forecasting that interest rates have peaked at 5.25% but note the stark contrast between the expectations of the financial markets for 2024 and the Bank of England. The markets are implying a drop in rates to as low as 4.0% by the end of the year, but the Monetary Policy Committee (MPC) continues to push the ‘higher for longer’ narrative, suggesting perhaps only two quarter-point reductions this year, with rates dropping to 4.75%.

UUEPC economists are forecasting a middle path with interest rates falling to 4.5% by the end of this year and then to a longer-term level of 3.5% by 2026, representing the new normal rate, significantly above the old normal of 0.25%.

Gareth continued: “It takes approximately 18-24 months for the full impact of interest rate rises to fully transfer through to the economy and therefore many of the more recent rises are yet to have an effect. Although growth is starting to pick up again in Q1 2024 after a challenging final quarter to 2023, if the Bank of England mis-judge and are too slow in bringing rates down, then clearly a contraction becomes more likely.

“One reason to be optimistic is the resilient nature of the labour market to a series of economic shocks, from the pandemic to higher energy prices and cost of living challenges which in turn has resulted in much higher interest rates. In these circumstances it would be reasonable to expect an increase in unemployment, but this has not occurred, employers are still reporting difficulties recruiting staff.”

Job creation in NI firms

The new UUEPC Winter Outlook brief also summarises other UUEPC research analysing the scale of job creation in firms that started between 2007 and 2021. Over this time period 68k employer firms started trading and although 38k had ceased by 2021, the net job creation was 253k. This includes both total jobs created and those lost when firms contract or cease trading.

Gareth, added: “The impact of new business starts on job creation should not be underestimated. To put in context, total employment in Northern Ireland has increased by only 90,000 since 2007, which shows that the existing business stock is more likely to contract in terms of employment than expand over time. As a result, maintaining and growing the size of the labour market is dependent on continuous entrepreneurial activity.

“This analysis period covered both the financial crisis in 2008 and more recently the pandemic, both of which took several years for the labour market to recover. Whilst these shocks may be viewed as atypical, economies are always subject to economic shocks and as a result new business starts are critical to economic recovery.”

Read the full Ulster University Economic Policy Centre: Winter 2024 Outlook report