The Northern Ireland (NI) economy is expected to grow by around 0.6% in 2023, leading growth outside of London, according to the latest edition of PwC’s UK Economic Outlook.
PwC’s UK economics team expects the UK economy to grow by around 0.5% in 2023 and 2024, and is likely to avoid recession. This is an improvement over PwC’s April Economic Outlook prediction of 0.1% growth for 2023, although economic activity is likely to contract in the third quarter this year.
From a regional perspective, London and NI are expected to grow the fastest, but growth is likely to remain subdued across all of the regions.
London is expected to benefit from strong performance in consumer-facing sectors. NI is expected to be the UK’s second-fastest growing region. NI benefits from greater certainty provided by the Windsor framework, while the relatively large public sector is sheltered from consumer spending pressures that hit other sectors.
The Midlands and Scotland are expected to grow at a relatively slower pace, in part due to their high exposure to the manufacturing sector, which has been hit by supply chain issues (which have largely recovered now), high energy prices, and changes to the UK’s trading relationship with the European Union (EU). 35% of businesses reported to the ONS in early October 2023 that they were still being ‘affected by recent increases in energy prices’, but this was down from 48% in January.
Caitroina McCusker, regional market leader at PwC Northern Ireland, said: “While the NI economy is growing at a faster rate than most of the rest of the UK, there is more to do to drive long-term economic growth.
“Our economy is currently experiencing a counterbalance of both positive and negative factors. The positive improvements seen in the easing of the global supply chain pressures and household energy bills is offset by stubborn inflation levels, rate rises, and industrial action in key sectors, which are weighing on economic activity.
“There is value in driving investment in the longer-term levers for economic growth here, including stimulating inward investment and accelerating support for skills and education.”
Inflation is expected to end the year at around 4.6% - higher than predicted in PwC’s PwC’s April Economic Outlook (3.5%) but comfortably below No. 10’s target of 5.4% for the fourth quarter of 2023. There will likely not be a linear decline in 2024 as current natural gas and peak futures prices are pointing to household energy prices rising in the new year, due to current geopolitical instability in the Middle East. A full return to a 2% inflation target is unlikely until 2025.
UK CPI inflation peaked at 11.1% in October last year and is down to 6.7% on the latest data. At a high level, this brings the UK closer to peers (5.6% in France and 4.3% in Germany, 3.7% in the US). Most of the recent falls in inflation have been driven almost exclusively by lower energy inflation. Services inflation is likely to drop down to around 6% by end of year, albeit only gradually as wage growth continues to remain above historic norms. Core goods inflation is expected to steadily drop as supply chains are in a better state, cost pressures are less intense and demand is slowing.
Greg Boyd, economist at PwC Northern Ireland, added: “Ever since economies have reopened following the pandemic, inflation has been front of mind for every single business leader and policymaker. As we approach 2024, there are some encouraging signs that it is finally subsiding. By the end of this year, we expect inflation to be less than half the 11% peak recorded last year, with No. 10 meeting its target to halve inflation. However, it will remain above the Bank of England’s 2% target for next year.
“Households in NI may still be feeling a tightness in their finances, as consumer prices are still increasing, albeit at a slower pace. The impact of this cumulative price increase is felt more profoundly in NI due to lower household incomes here and because NI households spend more proportionally on energy and food, the key drivers of recent inflation."