NI Chamber & BDO Quarterly Economic Survey: Brexit and lack of Executive having “an increasingly negative impact on business growth and investment plans”

Brexit and the lack of a local Executive are having “an increasingly negative impact on business growth and investment plans” according to the latest Quarterly Economic Survey published today (9 January 2019) by Northern Ireland Chamber of Commerce and Industry (NI Chamber) and business advisers BDO.

The survey reveals growing frustration amongst the business community as it deals with the fallout from the high levels of uncertainty created by both Brexit and the lack of an Executive in Northern Ireland.

Looking at the year ahead, the survey reveals that the majority of businesses (79%) believe that the lack of a Northern Ireland Executive will be damaging to Northern Ireland’s economic prospects in 2019 – with 52% predicting that this will have a negative impact on their own business also. Half of NI Chamber members report that Brexit is having a negative impact on costs with just over a third (35%) reporting a negative impact on their turnover/sales as a result of the EU Referendum.

The survey, which covers the Q4 2018 period, also reveals that weak order books along with falling investment intentions made for a muted end to 2018 for local businesses.

Key findings in the Q4 2018 survey:

In spite of these challenges, there are still signs of growth in the Northern Ireland economy overall - with almost all key balances positive meaning more businesses in manufacturing and services are reporting increases in indicators such as sales and jobs than those reporting a fall.

Manufacturing sector:

• Almost all key balances in manufacturing are positive in Q4 although 10 of the 14 key balances fell over the quarter and performance is down over the year in terms of sales, exports and jobs.
• Domestic and export order book balances are among the weakest across the UK regions as are employment expectations over the next 3 months.
• High raw materials cost pressures persist with 82% citing this as key driver of cost increases. 
• Pressure to raise prices remains high (+47% Q4 18 vs. +16% in Q2 16 before the Brexit vote took place). 

Services sector:

• It was a mixed performance in the services sector in Q4 18 with 7 of the 14 key services balances up on Q3 18.
• There were some positive signs around jobs with the balance of businesses taking on staff in the last 3 months and the share of business trying to recruit both above the UK average.
• There was also a slight uplift in export sales and orders. However the sector’s domestic (UK) sales performance was weak with a negative balance around sales in the next 3 months meaning more businesses expecting to see a fall in UK orders/sales than those expecting to see a rise. 
• Investment intentions in the sector continue to fall with balances at their lowest since the Brexit vote. 

Recruitment challenges:

• Manufacturers’ recruitment intentions weakened in Q4 18 with 63% of manufacturers trying to recruit (Q3 71%).  In services 56% were trying to recruit in Q4 18 (Q3 58%). 
• Difficulties recruiting staff remains a major issue for both sectors. Around 75% of those trying to recruit are finding it difficult to attract the right staff, largely skilled trades in manufacturing and professional/managerial in services.
• The share of manufacturers having difficulties recruiting skilled workers remains the highest on record. This is leading to growing pressure around pay settlements.

Brexit Watch:

NI Chamber’s regular Brexit Watch suggests that Brexit is having an increasingly negative impact on local businesses, largely around costs but also in terms of sales, the recruitment of non-nationals and in Q4 18 on exports also:

• 50% of members report that Brexit is having a negative impact on costs and 35% report a negative impact on turnover/sales (this figure was 22% Q4 16). 
• 32% report a negative impact on the employment of non-nationals in Q4 18 compared to a figure of 5% in Q4 16. 
• Around 1 in 10 businesses have reported a positive impact on business performance since the vote took place.
• More businesses are putting business growth and investment plans on hold because of Brexit.  33% of members have scaled down/put on hold business growth and investment plans in Q4 18 (24% in Q4 16). 
• Just under 1 in 5 members have expanded investment plans outside Northern Ireland since the vote took place. 
• Businesses are becoming increasingly negative around short-term business prospects in light of Brexit. In Q4 18 31% viewed business prospects over the next 3 to 5 years as poor/very poor because of Brexit - up from 25% in Q4 16.

2019 prospects:

• Almost 1 in 4 businesses (23%) believe that there will be some growth in the Northern Ireland economy in 2019, with over half (53%) believing that the local economy will contract this year.  This is much more pessimistic that in Q4 16 when 43% members believed that the local economy would grow the following year (2017). 
• Members are more positive about their own business prospects. 45% expect to see some growth in their business in 2019 and 15% expect strong growth.  However, around 1 in 4 members expect their own business to contract in 2019.
• The majority of members (79%) believe that the lack of a local Executive will have a negative impact on the Northern Ireland economy in 2019. Some 52% believe that this will also negatively impact on their own business.
• Particular frustration was expressed by members around the damage caused to regional investment and local decision-making as well as the fact that Northern Ireland has no political voice in the UK/EU negotiations.

Responding to the survey, Ann McGregor, Chief Executive of NI Chamber, said: “Whilst the economy is not contracting, it is clearly not growing robustly either. This quarter’s survey reveals that weak order books along with falling investment intentions made for a muted end to 2018 for local businesses. Throughout much of 2018, businesses were subjected to a barrage of political noise and drama, so it’s no surprise that Brexit, along with a lack of an Executive, are having an increasingly negative impact on business growth and investment plans.

“With little clarity on the trading conditions they’ll face in just two months’ time, some companies are understandably holding back on investment plans and making big decisions about their futures. The government’s absolute priority now must be to provide clarity on conditions in the near term and avoid a messy and disorderly Brexit – and action must also be taken to get the NI Executive up and running again.”

Ms McGregor concluded: “Whilst Brexit continues to dominate all of government’s attention and resources, it is far from the only cause of uncertainty. Given the magnitude of the recruitment difficulties faced by firm, business concerns about the government’s recent blueprint for future immigration rules must be taken seriously – and companies must be able to access skills at all levels without heavy costs or bureaucracy.”

Brian Murphy, Managing Partner at BDO, said: “The major challenges faced by business in 2018 look likely to continue. We are seeing caution from many businesses who are holding off on major investment decisions until they gain clarity around issues including Brexit, and the future of any new Executive. Exchange rates continue to be an area of concern for many businesses who also quote increased competition as a pressure point.

“Recruitment is still a major concern for businesses as well and it is vital to prioritise skills development to ensure adequate availability of skilled labour, aiding business growth. We need support from government in making decisions that will address this and other concerns which will assist the future prospects of our businesses.

“This quarter’s survey also shows is that in key areas NI businesses are holding their own and competing against their UK counterparts. Local businesses in both the Manufacturing and Services sectors are amongst the highest ranked regions who are operating at full capacity and manufacturing has also continued to invest in training, ranking 4th, showing a commitment for continued development of its employees.  These are very encouraging results, particularly when you consider the uncharted economic backdrop.”