Business

Productivity shortfall hurting north's economy says PwC report

Productivity in the north is well below the UK average
Productivity in the north is well below the UK average Productivity in the north is well below the UK average

POOR productivity remains the single biggest challenge to a sustained recovery in the north according to PwC's latest Northern Ireland Economic Outlook (NIEO) - and the situation doesn't look like it will improve.

And in an ominous warning, the NIEO says that if companies cannot significantly increase productivity, the impact of the new National Living Wage will squeeze profitability for businesses here and could lead to the loss of up to 4,000 jobs.

"The pace of Northern Ireland’s recovery is decelerating," PwC's Northern Ireland chief economist Dr Esmond Birnie said.

“Over the past seven months business confidence has been mixed, sometimes negative but always lagging the GB regions.

“There have also been recent mixed messages around consumer confidence, with June seeing the first rise in unemployment for more than two years. This may simply be a blip - or it may be indicative of a deeper malaise."

He added: “Currently, Northern Ireland’s output is still 8 per cent below the pre-crisis peak of 2008 and is something of a two-speed economy with employment contracting in public sector and financial services but growing fairly rapidly in advanced manufacturing, pharma, food processing and tourism.

“PwC forecasts that Northern Ireland’s economic growth will remain the lowest of the 12 UK regions at around 1.8 per cent in 2015 - lower than the 2.2 per cent growth experienced in 2014 - and will fall again in 2016 to around 1.7 per cent.”

Mr Birnie says that the Chancellor’s objective of creating a “higher wage, lower tax, lower welfare country,” means cutting working tax credits, compensating workers with a significantly higher National Living Wage, thus forcing employers to increase productivity if they are to create the conditions for sustainable wage growth.

He said: “Northern Ireland’s poor productivity is one reason why average wages and household incomes are below other UK regions – hence the region’s disproportionate reliance on benefits and working tax credits.

“The Chancellor’s proposals now mean that companies paying on or around the minimum wage faces an across-the-board increase in wage costs because of the mandatory National Living Wage.

“Their choice will be to increase productivity to cover the increased wages bill, absorb the cost entirely at the expense of profit or arrive at a combination of both."

The NIEO report predicts that that average Northern Ireland property prices will rise by 5.8 per cent this year and 6.2 per cent in 2016, and it also shares Bank of England Governor Mark Carney's view that interest rates will eventually go back up from their current record low of 0.5 per cent to around 2.25 per cent.

"Rates will most likely rise in small increments, perhaps only by a quarter percentage point for each rise. But businesses and householders need to be aware that rises are on the way and to ensure that borrowing and financial commitments are still affordable as rates begin to rise," the report said.

PwC's Northern Ireland facts and forecasts:

:: Overall unemployment has fallen by over 10,000 since June 2014, it has remained highest of 12 UK regions for two years.

:: 62 per cent of jobless have been out of work for more than 12 months.

:: One-in-five of 18-25-year-olds (19.7 per cent) are unemployed - well above the UK average of 13.2 per cent.

:: Output is still 8 per cent below the pre-crisis peak of 2008.

:: NI economic growth is lowest in UK at 1.8 per cent in 2015 and will fall again to 1.7 per cent next year.

:: Productivity is 82 per cent of the UK average and below where it was in 2002.

:: Employment will fall by between 1,500 & 4,000 when the National Living Wage is introduced.

:: Average NI property price in the first three months of 2015 was £119,646 – up 1.6 per cent up on the same period in 2014.

:: Average house prices will increase by 5.8 per cent in 2015 and 6.2 per cent in 2016.

:: Inflation will be 0.3 per cent in 2015 and 1.7 per cent in 2016.