At this time of year, economists reflect on the year that has passed and provide insight into what to expect ahead. Looking in the rear view mirror and at the road in front is far from pretty. 2011 started off badly, deteriorated mid-year and tailed off towards the end. Indeed, my own economic outlook this time last year proved to be overly optimistic for the fourth year in succession. Against this background, expectations for the year ahead are extremely, low but may still prove to be overly optimistic. Having become immune to surprises, we should expect the unexpected and more volatility in the year ahead.
From a local viewpoint, we will be closely watching the issue of corporation tax from two perspectives. First, whether the Republic of Ireland manages to hold onto its 12.5% corporation tax rate and second, whether Northern Ireland can secure such a rate if corporation tax powers are devolved. Clarity on both issues should emerge later this year. On this front, let’s hope for Northern Ireland’s sake that the London Olympics don’t provide a good opportunity to bury bad news.
This summer will also reveal the findings from a Chancellor-commissioned report into regional public sector pay. Both of these fiscal issues will have a significant bearing on rebalancing the local economy. Before then we will get a Spring UK Budget which will provide more detail on the additional spending cuts (2015/16 & 2016/17) announced in the Autumn Budget Statement. Against this context, Northern Ireland faces the unenviable position of being the UK region that has experienced the deepest recession and is also the most exposed to public expenditure.
It is also the UK region most exposed to the Republic of Ireland. With both the latter and the UK set to grow by one percent or less this year, the local economy will do well if it avoids negative growth.
Is the dragon firing on all cylinders?
Outside of Europe, 2012 could prove a significant year for China. In the Chinese calendar this is the year of the dragon. However, it remains to be seen whether China will still be firing on all cylinders. Opinion is divided over whether the booming Chinese economy will experience a soft or hard landing. I am sitting on the fence and expect it to experience something in between! 2013 is ominously the year of the snake. So far, China’s economic development has been all ladders and no snakes. However, the economic board game being played by most other economies is ‘Snakes and No Ladders’.
2012 will be another year of further restructuring for businesses and the start of reform within the public sector. Northern Ireland’s relative economic prosperity vis-à-vis the UK average is now back at levels last seen in 1992 . This underscores the need for a game-changing reforms and policies (e.g. lower corporation tax rate) to aid our escape from our longstanding SQSS condition – ‘Status Quo Stockholm Syndrome’.
Richard Ramsey, Chief Economist, Northern Ireland, Ulster Bank Capital Markets