Survey shines light on escalating energy costs and economic recovery issues
The latest Quarterly Economic Survey (QES) released Tuesday 8 April 2014, by Northern Ireland Chamber of Commerce and Industry (NI Chamber) in partnership with business advisors BDO reveals that the vast majority of businesses in Northern Ireland have experienced higher energy costs over the past year.
The majority of businesses (77%) believe energy costs in Northern Ireland are higher than elsewhere in the UK and the EU. 71% of firms have experienced higher costs over the last year, with rising costs a particular issue for manufacturers with 78% of them experiencing a rise in energy costs over the past 12 months.
Around two-thirds of members reported that they have taken some action to reduce costs including reducing their energy usage; installing energy efficiency devices; changing energy provider and renegotiating energy tariffs. Other steps cited include the installation of renewable energy sources (particularly solar panels) as well as switching from electricity to gas.
The Quarter 1 survey for 2014, made up of responses from over 300 local businesses, also revealed that mixed messages around Northern Ireland’s recovery continue to persist.
All key balances for Northern Ireland remain positive, with more businesses reporting an increase in domestic and export sales/orders, employment and investment intentions. However, the recovery is unbalanced as small but particularly micro businesses with less than 10 employees struggle to recover at the same pace as larger local businesses. Fewer of Northern Ireland’s smallest businesses are indicating increased sales and exports or are taking on new staff or trying to recruit. A deteriorating cash flow position is also becoming more of a concern for micro enterprises.
There are specific challenges to both the manufacturing and services sectors. For manufacturers, weakening balances include investment intentions along with confidence around turnover and profitability. For services, cashflow is becoming more of a concern and recruitment intentions have stalled. In fact Northern Ireland services recorded the lowest employment expectations balance across the UK regions meaning fewer service businesses are expecting to take on people over the next 3 months.
Positive indicators but considerable challenges
Ann McGregor, Chief Executive of NI Chamber, said: “There are some positive indicators for the Northern Ireland economy this quarter and we are making progress towards recovery. However it is still not clear that any strong recovery has taken hold and businesses are still facing considerable challenges. The most welcome results are in the export indicators. These indicators have been very low for a number of quarters so it is good to see a noticeable improvement on this occasion.
“More support for exporters is just one way the government can do more to ensure the recovery is a sustainable one. We have campaigned strongly about the negative message Air Passenger Duty is sending exporters and it was positive to see action taken in the Chancellor’s recent budget. However, we would like this to have gone much further, particularly given the impact of APD on Northern Ireland businesses.
“As the survey also shows, energy costs are an increasingly significant element of a businesses’ cost-base with global indicators suggesting that costs are only going to increase over the coming years. We simply cannot accept this and must continue to work with government to address the issue. In the meantime, businesses should at least have an energy audit carried out on their premises and business processes, in order to find out exactly where energy is being wasted and then implement improvements. Financial support for sustainable energy initiatives such as the Renewable Heat Incentive (RHI) and interest free loans can also help drive down costs.”
Specific findings relating to Quarter 1 of 2014 include:
Northern Ireland balances for manufacturing are below the UK average across all key indicators. Northern Ireland remains in the bottom three regions in terms of domestic and export sales/orders despite reporting increases this quarter. Investment intentions have weakened as has manufacturers’ confidence around turnover particularly but also profitability. However, the gradual improvement in export sales and order has continued this quarter. The cashflow position for some manufacturers has also improved this quarter. The cashflow balance is zero in Q1 2014, meaning that the same share of manufacturers have seen their cashflow position improve as deteriorate over the last quarter. In Q3 2013 the cashflow balance was -12%.
The percentage of service businesses reporting an increase in domestic sales improved in Q1 2014, with the balance for Northern Ireland services now higher than the UK average. However, employment balances weakened this quarter and the cash flow position appears to have deteriorated. Pressure to increase prices has returned in Q1 2014.
Recruitment intentions in both manufacturing and services have fallen this quarter, consistent with the wider UK experience. The percentage of manufacturers trying to recruit has fallen from 71% in Q4 2013 to 57% in Q1 2014. In services the figure has fallen from 85% in Q4 2013 to 58% in Q1 2014. However, where businesses are recruiting they are now more likely to be taking on full-time and permanent staff. In Q4 2013 manufacturers particularly were more focused on recruiting part-time and temporary staff. Fewer businesses are also experiencing recruitment difficulties this quarter. However, difficulties remain for manufacturers in recruiting skilled manual staff and for both sectors in recruiting professional/managerial staff.
Business Issues and Concerns
Competition remains the most important concern to businesses by a considerable margin. This is followed by interest rates and business rates. The survey also revealed that manufacturers in particular are concerned about exchange rates. Taxation and interest rates are bigger issues for Northern Ireland’s smaller businesses but particularly micro-enterprises.
Wage rises anticipated and demand growing
The survey revealed that over the coming year, 60% of members believe wages in their business will increase. However these are largely anticipated to be below the current level of inflation, with only 23% of members expecting wages to rise by 3% or more. Wages rises are viewed as much more likely in Northern Ireland’s larger businesses.
There is some sense that demand is increasing, particularly for manufacturers. Around half of businesses are expecting to increase capacity utilisation this year, although 43% expect it to remain unchanged. Around half of those businesses which are expecting no change in capacity utilisation are still anticipating wage increases which have negative implications on Northern Ireland’s already low level of productivity.
Time for action
Commenting on the findings, Sean Lavery, Tax Partner at BDO, said: “The survey reflects the current mood of our clients that we are at the rocky bottom of the recovery in Northern Ireland. There are areas for optimism but just as many for caution and concern. This position is to be contrasted with the rest of the UK which shows a more positive and sustainable growth picture.
“The concern is that without any significant assistance to greatly bolster the Northern Ireland private sector, the gap between Great Britain and Northern Ireland will continue to widen and the Northern Ireland private sector will not be able to absorb the future cuts in public sector.
“The time for talking has passed. The creation of a new enterprise zone for Coleraine in the Chancellor’s recent Budget is to be welcomed but does not nearly go far enough; they need to cover the whole of Northern Ireland. In addition, resolution to Northern Ireland’s Corporation Tax debate (and resultant introduction therefore) needs actioned immediately after the Scottish Referendum vote.”
The Quarterly Economic Survey (QES) is the largest and most representative independent business survey of its kind in the UK. It is the first economic indicator of the quarter, published in advance of official figures and other private surveys, and it consistently mirrors trends in official data. For this reason the survey is closely watched by policymakers such as the Treasury, the Bank of England and the new Office of Budget Responsibility.