Expert Comment: Michael Smyth - Ulster University
"The key to the future success of the economy will be the extent to which the private sector expands, and franchise activity is likely to play a prominent part in this."
After many false dawns, peace may finally have broken out in Northern Ireland!
Phrases such as 'historic agreement', 'momentous events', 'unprecedented changes' have been used to describe what is probably the final chapter in the Northern Ireland peace process.
But if the political struggle is now at an end, the struggle to rebuild the economy is about to begin. I use the term rebuild because economic activity in Northern Ireland is far from 'normal' in that one third of all jobs are in the public sector and public expenditure represents about two-thirds of the total economy. The current structure of the economy has of course been produced by over 30 years of civil unrest (at times close to civil war) and terrorist violence.
Even though employment is at an all-time high of over 700,000 and unemployment at an all-time low of 4.2 per cent (compared to the UK rate of 5.5 per cent), Northern Ireland average incomes have remained static at around 80 per cent of the UK average. The challenge facing the new Northern Ireland Assembly and Executive is to raise the economic growth rate and with it the average level of incomes. To achieve this a significant increase in outside investment is needed.
It remains to be seen just how powerful an impact the peace settlement will have on outside investors. It seems clear that we will experience an increase in business investment and tourism in the months ahead but the task of sustaining higher levels of outside investment beyond that will be a difficult one.
Unlike other parts of the United Kingdom, Northern Ireland suffers because it shares a land frontier with the Republic of Ireland, one of the wealthiest and fastest growing economies in the northern hemisphere. 23 of the Fortune 100 companies have major investments in the Republic and virtually none are located in Northern Ireland!
The main political parties, the DPP and Sinn Fein, campaigned strongly for a competitive rate of corporation tax in order to support economic development and the Chancellor of the Exchequer has agreed to set up a commission to examine the case. It is widely accepted that a more competitive rate of corporation tax here could rapidly transform the economy (as it has done in the Republic) and raise living standards but it is a difficult ask in political terms.
One of the most striking features of the Northern Ireland economy in recent years has been the acceleration in house price inflation. In the main the spectacular rise in house prices has been caused by an ongoing shortage of properties on the market relative to a buoyant level of demand. In particular there is a very strong buy to let segment of the market and there is evidence of investment activity from south of the border. Over the last 12 months house prices have risen by nearly 40 per cent and there is every indication that further high double-digit growth will continue for at least another 12 months.
In order to meet the expected faster economic growth the Investment Strategy for Northern Ireland will deliver £16 billion worth of infrastructural investment over the next 10 years; the economic impact of this will be significant.
There is buoyancy in consumer demand due to high levels of employment, low-inflation and relatively low interest rates. The 'catch-up' in retail development in Northern Ireland is now almost complete with the imminent arrival of John Lewis and Ikea. However there remains a franchise gap with the rest of the United Kingdom. The key to the future success of the economy will be the extent to which the private sector expands, and franchise activity is likely to play a prominent part in this.