NI’s business recovery risks losing momentum as price pressures mount

L-R, Chris Morrow, Head of Communications & Policy at NI Chamber, Brian Murphy, Managing Partner at BDO NI and Ann McGregor, Chief Executive, NI Chamber. 
 

• 1 in 3 companies are performing better than before the pandemic
• 58% of businesses have seen costs rise by 6% or more
• 61% are expecting to raise prices in the next 3 months
• 69% expect to increase wages in the next 6 months
• 80% are experiencing recruitment difficulties

The latest Quarterly Economic Survey findings, published today (20 October 2021) by Northern Ireland Chamber of Commerce and Industry (NI Chamber) and BDO NI suggest that while there are positive signs of recovery in the Northern Ireland economy, inflationary pressures from mounting business costs and labour availability are negatively impacting business confidence.

 

According to the survey, expectations to raise prices are the highest on record since before the Financial Crash (circa 2008). 62% of manufacturers and 60% of service businesses expect to raise prices in the next three months.

Three in five firms (58%) saw costs rise by 6% or more in Q3 2021. For one in ten firms, business costs have risen by more than 20% over the last nine months. There are multiple and in some cases interlinked drivers of these cost pressures including the impact of EU Exit & the NI Protocol, rising raw material costs, rising energy costs, wage increases and supply chain disruption.

Confidence
Confidence dipped during Q3 21, particularly for manufacturing businesses. This came after a positive improvement in recent quarters as the economy began to recover from the fall-out of the pandemic.  The turnover confidence balance for manufacturing fell to +24% (+41% Q2 21) and for services to +39% (+44% Q2 21). Confidence around profitability was particularly low in Q3 21. The balance turned negative for manufacturers in Q3 21 (-3%), meaning that more manufacturers are expecting profitability to fall than those expecting it to rise. The corresponding figure for services was positive but low at +9%.  

Investment intentions remained positive for both manufacturing and services in Q3 21, although the balances fell in manufacturing.

New trading arrangements post EU Exit

The Q1 and Q2 21 surveys showed that adjusting to new trading arrangements has been challenging for some businesses, although there have been signs of improvement. During Q3 21, 45% of businesses said that they had adapted well to the new trading arrangements (44% Q2 21 and 15% in Q1 21). However, almost a third (32%) said they were still finding new trading arrangements difficult. A core of around 13% of businesses were still finding the new trading arrangements extremely challenging (14% Q2 21).

Covid-19 recovery
Business recovery from the pandemic is mixed.  In Q3 21, one in three companies stated that they were performing better than pre-pandemic. One in three were performing about the same as pre-pandemic and one in three were performing worse.  Of those who performed worse, around one in five don’t expect the business to recover to its pre COVID-19 performance. 

Manufacturing

After a relatively strong performance in the last quarter, the Q3 21 findings suggest that the manufacturing sector has been hit by persistent and new challenges that are impacting business confidence.

In Q3 21, all key indicators fell, although they remained stronger than during the most challenging period of the pandemic. Three key indicators were negative; export sales, cash flow and confidence around profitability, meaning that more firms experienced falls in these indicators in the last quarter than those seeing an increase.

Expectations to raise prices remained high, with rising raw material costs the key driver. In addition, twice as many NI manufacturers were experiencing pressure from pay settlements (42%) compared to the UK average (22%).

Services
Q3 21 saw the strongest trading performance from the service sector since the onset of the pandemic, in part reflecting the fact that restrictions were increasingly being lifted for some.

Key balances around domestic sales and exports were positive in Q3, meaning more firms are expanding rather than contracting. All 11 key services balances were positive, which means that more members are reporting improvements in domestic sales/orders, export sales/orders and cashflow than those reporting any fall.

Recruitment activity in the service sector recovered strongly in Q3 21.  However, confidence dipped slightly with falling profitability, greater concerns around inflation and increasing pressure to raise prices coming to the fore.

Recruitment

In Q3 21, 70% of manufacturers and 74% of services were trying to recruit.  Recruitment difficulties were one of the most persistent and growing concerns among members pre COVID-19. It is now re-emerging as a significant issue, with 80% of survey respondents in Q3 21 finding it difficult to get staff.

At the same time, firms are facing strong pressure to raise wages. 69% of businesses who responded to this survey said they expect to increase wages in the next six months and more than 40% of them expect those rises to be above inflation. This is driven by a range of factors including the need to retain staff (43%) and/or recruit new staff (27%) rather than the strong performance of the business (16%).

Commenting on the survey findings, Ann McGregor, Chief Executive, NI Chamber said:

“While it is certainly positive to see signs of economic recovery in Northern Ireland, conditions remain extremely fragile and challenging for firms in both manufacturing and services.

“We have seen some really positive momentum build in business recovery and for some sectors and businesses, sales performance is now very strong.  However, business trading conditions are undermining these gains with a combination of higher costs, supply-chain and logistics problems, increasing labour shortages and wage pressures.

“Taken together, these elements are beginning to erode business confidence despite the amazing effort by firms to build back from the pandemic. Profitability is being squeezed to the point where businesses have no alternative but to consider increasing prices, a decision that isn’t taken lightly by our members at this time.

“These survey results clearly indicate that our post pandemic economic recovery is losing some of its momentum.  To keep business recovery in Northern Ireland firmly on track, any decisions by the UK government, for example, in the forthcoming Budget and Spending Review, should focus on actions that reduce, rather than increase, costs for Northern Ireland businesses and support the levelling up agenda that we keep hearing about.  One such action which we would support would be the introduction of a moratorium on all policy measures that increase business costs for the remainder of this parliament.”

Brian Murphy, Managing Partner, BDO NI added:

“Although these results are mixed, it’s important that we assess them in the context of the last two years of upheaval and uncertainty. We recognise the concerns many firms have but we are also able to report that for many they are returning to pre-pandemic levels of business. It is remarkable to see how far we’ve come and how resilient our local businesses have been.

“It would take the hardest of hearts not to be cheered by the fact firms are now reporting increases in domestic sales and projecting greater confidence too in turnover growth and investment intentions. Only a few months ago, this would’ve been unthinkable.

“The key challenge for the business community will be balancing the delivery of this projected growth whilst maintaining stability in the face of growing business costs and inflation.”