At this time a year ago it would be fair to say that the view of Belfast firms on the market in Northern Ireland (NI) was bullish. Today the atmosphere has, of course, changed, due to the well-rehearsed shifts in lending liquidity, interest rates and the residential property market. There is no doubt that all of these issues (and more) present real and immediate implications for firms, but what mid-term and long-term lessons can we learn about NI’s economy and how these will affect Belfast firms over the next two to three years?According to figures produced by Oxford Economics (referred to in the Department of Enterprise, Trade and Investment’s most recent quarterly survey), NI had 5.6 per cent economic growth in 2006, 4 per cent growth in 2007 and 2.8 per cent is projected for 2008.
When we turn to exports, NI’s estimated figure for 2006-07 was £5.1bn, which compares favourably to the 2001-02 figure of £948m. Some 70 per cent of these exports, however, continue to be to Great Britain and the Republic of Ireland, with only 30 per cent going further afield. This highlights one of the key challenges for the NI economy, as expansion into global markets requires time and significant investment.
Less encouraging are statistics showing that per head NI still has the second-lowest productivity figure in the UK and that private sector output has declined in the three months from December 2007 to February 2008. This has been confirmed by recent local banking reports, which also confirm that the decline over the last quarter has been marked, with construction and manufacturing registering the highest rates of decline. Further tightening in the corporate markets is expected later this year.
A mixed bag, therefore. So what strategies are being pursued at the political level in response to these challenges?The recent draft programme for government and draft budget have provided the first examples of what the newly formed executive’s priorities with the local economy will be. Foreign direct investment (FDI) continues to be a key plank of this strategy and there have indeed been some notable successes in the past 12 months, with companies such as Warner Chilcott, Schrader Electronics, Fidessa and Citibank all coming on board.
The holding of a successful US-NI three-day conference in an effort to attract further North American investment was also positive and should be welcomed as a step in the right direction. However, the follow-on work will be the critical factor. Will this form the basis of similar conferences each year?While the 2006 Varney report – ‘Service transformation: A better service for citizens and businesses, a better deal for the taxpayer’ – predictably did not recommend a reduction in corporation tax in NI as a means to promote FDI, there still remains an opportunity for the executive, in conjunction with the main UK Government, to come up with other methods of achieving stimulation, not only for FDI, but for small to medium-sized enterprises (SMEs).
Another central plank of government strategy identified is investments into infrastructure, such as water and sewage, transport, air and ports, energy and telecoms. The announcement by Gordon Brown at the US-NI conference as to the availability of some of the funds from the disposal process of public assets in NI being planned will assist to fund this strategy.
Taking all of the above into account, how will Belfast firms fare in the short term? There is no doubt there will be a short-term to medium-term tightening of certain markets and areas within those markets, for example in residential property and related sectors. However, commercial property is still in reasonable health and prices seem to be continuing to improve.
We are also seeing many instances of well-established clients viewing the next 12 months as a period of opportunity as well as a period of challenge. On the corporate side there would appear to be sufficient activity in relation to acquisitions with either international or trade elements where obtaining high leverage is not as big an issue. There is no doubt that highly leveraged private equity deals and management buyouts will face more difficulty over the coming 12 months.
Similarly, there is no doubt that the local economy has seen tremendous growth and development over the past five years and that the growth in the Belfast firms reflect this.
While the next couple of financial years may see a levelling out of growth for legal firms generally, a well-balanced firm with a good spread of expertise across all sectors and with the right people (of most importance) should be able to take advantage of the long-term economic developments that are continuing to take place, notwithstanding the immediate short-term problems.
Ian Coulter is a corporate partner at Tughans Solicitors