Growth of business activity remains solid, but inflationary pressures intensify

Today sees the release of January data from the Ulster Bank Northern Ireland PMI®. The latest report – produced for Ulster Bank by Markit – pointed to a positive start to 2017, with further increases in output, new orders and employment recorded. That said, rates of expansion eased from the end of last year. Meanwhile, price pressures continued to intensify, with rates of inflation for both input costs and output prices among the sharpest in the survey’s history.

Commenting on the latest survey findings, Richard Ramsey, Chief Economist Northern Ireland, Ulster Bank, said:

“The Northern Ireland private sector started the year with strong momentum, as growth remained solid, albeit having eased from December’s 29-month high. Employment, new business, and export orders also eased back, but the latter remains very strong, suggesting that the favourable exchange rate continues to be a significant factor in the local economy. Whilst activity eased, inflationary pressures are accelerating - another indication of the impact a weak sterling is having on local businesses through the increased cost of imports. Indeed input cost inflation increased at its fastest rate since May 2011, with higher wage pressures also cited as a significant factor. This is impacting on the prices charged to customers, with output cost inflation at its highest level since 2008. Manufacturers are experiencing the largest rise in their cost-base due to a dependence on imported materials, with a huge surge in January, the most intense inflationary pressure on record. Manufacturers are also raising the prices of their goods at a record rate, but it appears that they are trying to absorb some of the increased costs themselves to maintain competitiveness, which will inevitably impact on profitability. Retailers on the other hand appear to be passing on their increased costs entirely to the consumer, and it will be interesting to see to what extent this impacts on consumer confidence and spending in the months ahead – particularly as retail has been the fastest growing sector since mid-2016.

“Looking at construction and services, there are a number of positives. Construction activity was broadly flat in January, following a sustained period of contraction, and with employment picking up for the second month in a row, it appears that the fortunes of the sector are improving. However, anecdotally, it would appear that this improvement is almost entirely driven by Belfast, where the crane count is at its highest level since 2008. Services output growth remains solid and there was a modest acceleration in employment growth in the sector.

“Overall, the positives of the weak sterling, which have been prominent for a number of months, continue to be evident, but the negatives of the exchange rate are also starting to feature more and more prominently. This will be a major feature of the year ahead as inflationary pressures continue to intensify and indeed accelerate. Slower growth and higher inflation look set to be the order of the day.”

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