Page last updated at 10:00 GMT, Friday, 26 December 2008

Calm economy heads into choppy waters

Economist John Simpson looks back at the lows and highs of the past year.

Credit card being cut in half
The credit crunch has begun to bite in a big way for many
The Northern Ireland economy has been sharply and adversely hit by the downturn in the housing market.

House sales and house prices in 2008 have been well below the levels of early 2007.

House prices, on average, have fallen by more than 25% in the past year and the number of private sector housing deals in late 2008 is over 40% lower than in 2007.

Going into 2009, the housing market has probably begun to bottom out.

The backlog of potential demand for new housing is growing and mortgage interest rates are now more attractive.

The restraint on further recovery is the availability of mortgage finance and the terms on which it is available.

Whilst funds are still available, but not plentiful, lenders are now taking a more conservative view of mortgage approvals and, by repute, offers of 100% finance are rare, and significant initial deposits are often expected.

A further conspicuous consequence has been the fall in the number of new cars being purchased

Developments in housing finance have rippled out to hit the construction industry and, less directly, to impact on household spending.

The construction industry is heavily reliant on house building and repairs, along with the government's capital investment programme, particularly in water infrastructure, roads, education and health.

The government's capital expenditure plans, packaged as the Investment Strategy, have largely been maintained but not on a scale that could compensate for the fall in house building.

A feature of 2007 had been an expectation that the Northern Ireland Executive could finance part of the capital programme from the receipts arising from sales of land and property.

The fall in property and land prices has delayed the ability to deliver this strategy in full.

Nevertheless, big progress was made in 2007 in a number of areas:

  • The refurbishment of key parts of the waste-water drainage systems across (and under) Belfast;

  • Work on the main missing link of the Belfast-Dublin dual carriageway around Newry;

  • Plans were well advanced for hospital investment in Enniskillen and Omagh;

  • Major projects to provide buildings for Further Education are on the drawing boards for Belfast Metropolitan College, and;

  • The last stages in the approval for a 100m Titanic signature project have been reached.

Household spending appears has become more restrained in 2008, and the explanation for this downturn is complex.

Total employment has increased in 2008, but at a slower rate.

More importantly, there have been more pessimistic assessments of the forthcoming changes in the jobs market, forecasts of a rise in unemployment, and a fear that the real value of earnings could fall as price increases exceed adjustments in earnings.


Unemployment has been slower to increase than in other regions and employment has been more buoyant than might have been expected


Restrained household spending power and unwillingness to finance spending through an expansion of household credit, have come together to rein-in consumer spending.

The changed prospects for the real value of earnings have interacted with the loss of confidence in the housing market.

In turn, the reduction in the number of housing transactions has affected the market for household durable goods, particularly in the furnishing of new homes.

A further conspicuous consequence has been the fall in the number of new cars being purchased.

Early in the second half of 2008, new car registrations were 20% below the levels in 2007.

In the later months of 2008, there is increasing evidence that the general global downturn is impacting in Northern Ireland.

In December, that impact has begun to show in cutbacks in manufacturing production and a mixture of official redundancies and short-time working.

Household incomes have been stretched

Some firms in the supply chain for the vehicle or equipment manufacturers have laid off workers.

The expectation is that industrial output will fall in the early months of 2009, backed by the hope that during the year, with the support of the stimulus injected by government actions, there will be some recovery.

The most recent evidence from official statistics in that the value of sales by local manufacturers increased last year by more than 5%.

Corrected for price changes, the estimate is that sales increased by 2%.

The pattern of sales reveals a shift in emphasis.

Whilst sales to the market in Great Britain were 2% higher, when converted for price changes this represented a fall of nearly 2%.

This slowdown has been seen in reports from the wholesale and retail sectors, where turnover in mid-2008 was 7% down on a year earlier

In contrast, sales to the Republic of Ireland increased by 10%, or nearly 7% in real terms.

The concern in 2009 is the extent to which reduced order books may erode these figures.

Northern Ireland has, in recent years, increased its reliance on the services sector, including services for the home market and services supplied and sold to external customers.

The official statistics show that the services sector has been less buoyant since early in 2007.

This slowdown has been seen in reports from the wholesale and retail sectors, where turnover in mid-2008 was 7% down on a year earlier.

This is consistent with the assessment of a drop in household spending.

In parallel, lower turnover has been a feature of business services and finance (which may reflect a cut in revenue from external customers) and also in hotels and restaurants (which may be a mixture of a lower domestic market and possibly a weaker tourism spend).

Official policy for Northern Ireland must emphasise steps to further strengthen the economy to be better able to offset any recession

At the end of 2008, two more optimistic features are notable.

First, unemployment has been slower to increase than in other regions and employment has been more buoyant than might have been expected.

Second, despite the fears of job losses and lower total earnings, average earnings have not fallen much below inflation.

Private sector earnings (to April 2008) rose by 3.8% pa.

However, this was less than the UK average of 4.6%. The differences are enough to confirm that household incomes have been stretched.

For 2009, the prospect is that Northern Ireland will share the downturn that is now affecting the rest of the UK and the Republic of Ireland.

As events evolve, official policy for Northern Ireland must emphasise steps to further strengthen the economy to be better able to offset any recession and to be better able to exploit the recovery when it comes.

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