Pictured L-R: Ann McGregor, Chief Executive, NI Chamber, Brian Murphy, Managing Partner at BDO NI and Maureen O'Reilly, Economist at NI Chamber.
- Most key business indicators around sales and jobs remained positive in Q2 2022 but growth appears to have slowed
- 72% of businesses state that costs are a significant challenge
- A majority of businesses (72%) have some concerns about their cash flow position
- 62% are facing significant challenges with labour availability
- 91% of survey respondents believe that the UK economy could go into recession if current economic conditions persist
A majority of businesses in Northern Ireland are trading positively, however acute inflationary pressures are starting to negatively affect business performance and confidence. That is according to the latest Quarterly Economic Survey results for Q2 22 from Northern Ireland Chamber of Commerce and Industry (NI Chamber) and business advisors BDO NI.
Businesses are generally positive about turnover growth in the next 12 months, with 52% expecting turnover to grow. However, this is down on previous quarters (60% Q1 22 and 70% in Q4 21) and while still showing some signs of growth, the Q2 22 findings suggest that business growth in Northern Ireland economy is slowing and confidence is waning. More than half of respondents (55%) have seen some slow-down in demand for products and/or services. For 15%, that slow-down has been significant.
Inflationary pressures remain acute affecting nine in ten businesses. Raw material costs are a significant driver for manufacturers. In Q2 22 labour costs have also emerged as a very strong driver for both the manufacturing and services sectors, affecting twice as many members in Q2 22 compared to Q1 22. This is being driven in large part by challenges in recruiting staff. Rising utility and fuel costs are also key cost pressures.
Rising costs continue to drive up expectations to raise prices which remain very high among both manufacturing and service businesses. In Q2 22, 83% of manufacturers and 75% of services businesses expecting to raise prices in the next three months.
The share of businesses facing pressure to raise prices because of rising labour costs has almost doubled over the quarter, again affecting both the manufacturing and services sectors.
Cash flow and debt
Most members have some concerns around their cash flow position but there is no strong sense that the ability to pay back debt is an issue. In Q2 22 there has been a slight improvement in the cash flow (-17%) balance for manufacturers after concerning dip in Q1 but it remains the case that more manufacturers are reporting a deteriorating cash flow position than those reporting any improvement. In services the balance remains flat at +1%.
Risk of recession
The Bank of England has recently flagged a potential risk of recession in the UK because higher energy prices could push inflation above 10%. 91% of members who responded to the survey believe that the UK economy could enter recession if the current economic conditions persist.
The Q2 22 findings suggest that more businesses affected by new trading arrangements (3 in 4) are adapting to changes. In Q2 22 70% of those impacted have adjusted to the arrangements in their current form, up from 52% for the same quarter in 2021, suggesting a considerable improvement. However, 1 in 4 members do continue to find the new arrangements challenging.
66% state that EU exit has negatively affected business costs and for 54%, the ease of doing business. 28% have stated that it has negatively impacted on overall sales performance while for 19% it has been positive for sales. The impact on exports has been less pronounced, with 26% of members reporting a negative impact, against 22% reporting a positive change. 44% state that EU Exit has negatively impacted on their business in terms of the ability to access to skilled staff.
Almost all key indicators remain positive suggesting there is still some growth in the sector. However, the domestic sales balance is just +1% in Q2 22 suggesting that almost the same share of businesses are experiencing a contraction in sales as those experiencing a rise. The export sales balance is positive (+8%) and back at 2019 levels. Cash flow is the only negative indicator, while confidence around profitability is flat.
The Service sector recovery weakened in Q2 22, reflecting a poorer performance in the domestic economy. Almost all key indicators are positive, with the exception of confidence around profitability, suggesting that the sector is growing. However, most balances fell over the quarter with the exception of exports balances (which are low). The domestic sales balance fell from +26% in Q1 22 to +10% in Q2 22.
Notably, Northern Ireland’s export balances are positive and rank highly relative to most other UK regions, some of which have negative export balances suggesting a deteriorating export position in those regions.
73% of manufacturers (74% Q1 22) and 58% of services (65% Q1 22) were trying to recruit in Q2 2022. Recruitment difficulties remain one of the most persistent and growing concerns among members. In Q2 22 89% of manufacturers and 87% of services were finding it difficult to get staff.
Commenting on the findings, Ann McGregor, Chief Executive, NI Chamber said: “While it is encouraging that a majority of our members traded positively in Q2, behind this, the results of the latest QES survey indicate a crystallization of the many challenges that they are currently facing. The reported slow-down in demand is a concerning indicator and while we might expect that there would be some slow down after the relatively strong rebound for many after COVID, businesses are now facing an entirely different set of challenges which have been largely unanticipated.
“Inflationary pressures are acute, impacting on profitability not only in energy intensive companies, but also among service businesses too. That is inevitably leading to pressure to increase prices.
“While 1 in 4 businesses continue to find current post-EU exit trading arrangements challenging, 70% are adjusting to the changes, up from 52% in the previous quarter. This suggests a considerable improvement under the arrangements in their current form. Northern Ireland’s export balances under these current arrangements are also positive in contrast to some other UK regions where balances suggest a deteriorating export position.”
Brian Murphy, Managing Partner, BDO NI said: “Despite the uncertainties created in recent years by Covid and Brexit, 82% of last quarter’s respondents have reported that they are trading positively, post pandemic, with 70% having also adapted to the post EU trading procedures. Considering the scale of the challenges, this is an incredible result and certainly tells me that businesses in Northern Ireland have been making the most of the good days.
"Unfortunately, the positive momentum that has been building in the economy will be very much needed to mitigate the cost of living and the cost of doing business that are taking their toll on many, with 72% of firms expressing concerns about cashflow and the impact of rising costs on the bottom line and 79% of those businesses expecting to have to raise prices as a result.
"Businesses in NI have already demonstrated their flexibility and innovative approaches in recent years, but there is only so much that they can do on their own. If we are to endure a storm, we need to work in partnership with all of our stakeholders to help shape the conditions that can support and protect local jobs and local companies. The pandemic has shown us that we can all work together to achieve great things, despite the magnitude of the challenges. The challenges ahead have the potential of being even more impactful on our economy than what we have dealt with in recent years, plus there may be no quick fix and we may have a long road ahead of us.
“As well as businesses, employees, suppliers and the banks, our Executive has an important role to play in continuing to use its influence in Westminster to make the right calls on taxation, regulation, investment and if needed, financial intervention. Businesses can prepare for rainy days; they can adapt to a changing climate, but they still need everyone to work together to help weather a storm.”
Read the report.