Manufacturing & Supply Chain

53% of Northern Ireland’s manufacturers are expecting to raise prices over the next quarter, the highest share recorded since the time of the financial crash.  According to results from the latest Quarterly Economic Survey for Q1 2021, carried out by Northern Ireland Chamber of Commerce and Industry (NI Chamber) and BDO NI, price pressures are coming to the fore. 92% of manufacturers are experiencing pressures from rising raw materials costs, resulting in expectations to raise prices in the next three months.

The survey suggests some signs of recovery in the Northern Ireland economy during the first quarter of 2021, particularly in manufacturing, but with some way to go to recover all of the lost ground precipitated by the COVID-19 pandemic.

Confidence and investment intentions

Business confidence has continued to improve in Q1 2021 after the large collapse experienced at the start of the pandemic. In fact, the business confidence indicators are positive in Q1 2021, meaning that more businesses believe that their business turnover and profitability will grow over the next 12 months compared to those who believe that it will fall.

Manufacturing

In manufacturing, all key indicators including those around domestic/export sales and jobs improved in Q1 2021 with the exception of the % of businesses operating at full capacity, which has been falling, down from 27% in Q4 2020 to 25% in Q1 2021.  Some key balances remain negative, particularly around trade and cashflow, although order books are beginning to improve. Indicators that are positive for the manufacturing sector in Q1 2021 include employment expectations and confidence around turnover growth in the next 12 months. A number of the performance indicators are back to Q1 2020 levels, albeit that these were in negative territory and not performing particularly well going into the pandemic.

Services

The services sector is showing much slower signs of recovery than manufacturing, particularly around exports and investment intentions.  However, the sector is showing increasing signs of confidence around turnover growth and expectations to take on staff are rising.

While almost all key indicators in the services sector improved, 8 of the 11 key services balances remain negative.  This means that more members are reporting a deterioration in domestic and export trade, cashflow and investment intentions than those reporting any improvement.

New trading arrangements

Ann McGregor, Chief Executive of NI Chamber.

Two in five businesses (41%) reported difficulties in adapting to new trading arrangements for their business/supply chains, with 14% findings them very difficult.  15% have found the new arrangements relatively easy to deal with, while 18% believe it is too early to say.  According to the survey findings, new arrangements appear to impacting on trading relationships for some businesses, particularly in terms of trade with Great Britain. 18% of members stated that the new arrangements have had a major negative impact on their trade with Great Britain and 34% have experienced a minor negative impact.

However, the same survey also shows that two in three members (68%) believe Northern Ireland’s status post EU Exit presents opportunities for the region.  47% believe the new trading status will present opportunities for their own business going forward.

Covid-19 impact

Members’ initial reaction to the COVID-19 crisis was very stark, particularly in Q2 2020. Signs of improvement have been reinforced in Q1 2021, with 54% of members stating that they traded well or reasonably during the quarter. However, conditions remain very challenging for a sizeable minority of around one in three members, with 15% seeing no signs of improvement at all.

Positivity

Some businesses are beginning to make more positive changes including exploring new markets, increasing marketing and staffing in Q1 2021. 38% are planning to explore new markets, 37% plan to increase their marketing and communications activity and 29% plan to take on new staff (while 12% plan to reduce staff numbers).  23% proposed to reduce capital investment against 21% expecting to increase it.

Commenting on the survey findings, Ann McGregor, Chief Executive, NI Chamber said: “Price pressures are emerging as a significant concern from Q1, particularly in the manufacturing sector. Hikes in the price of raw materials are a significant factor, but we also know that there are multiple other escalating costs contributing, including higher logistics costs and significant additional costs associated with trading during COVID-19. Over the course of the next quarter, we can expect to see a sizable portion of these price rises passed on to the consumer, as firms simply cannot afford to absorb them.

“The survey does show that some of the lost ground experienced in the economy since the start of the pandemic has been recovered and confidence is starting to return, particularly in manufacturing. However, we must temper this with the reality that large parts of the economy are still shut down, there remains significant spare capacity and many key balances remain negative, meaning that there are still more businesses in Northern Ireland reporting falls in domestic and export sales/orders, cashflow and investment than those reporting an increase.

“This is the first Quarterly Economic Survey since new trading arrangements came into effect on 1 January after the end of the EU exit transition period. In Q1, some members have reported significant difficulties. NI Chamber has been working closely with businesses adapting to the rules and we know that there are multiple factors leading to these difficulties. For example, issues with the technology are hindering their ability to complete the cycle of customs clearance requirements. An onerous volume of information is needed and in many cases, the actual data is inaccessible. Issues around what is defined as goods ‘at risk’ continue to be troublesome. In addition, defining origin is a challenge, with companies unsure how to classify their products.

“Our members tell us that there is also a significant level of misunderstanding among customers and suppliers about Northern Ireland’s trading status both within the UK and with the EU, which is contributing to delays, additional paperwork and costs. In some cases, it is also triggering EU and GB customers to source goods elsewhere. There is therefore an urgent need to educate customers and suppliers in new trading arrangements.”

Brian Murphy, Managing Partner, BDO NI added: “Brexit and Covid continue to be the major factors impacting business performance. However, the survey shows that some local firms are now quietly confident about their growth prospects over the next twelve months.

“All progress must be welcomed and whilst the survey indicates signs of recovery, there is still a way to go to recover the lost ground brought on by the pandemic.

“The degree of confidence varies between sectors, with manufacturing showing progress in areas including future employment and turnover. A key obstacle for future growth within that sector will be balancing the pressures of rising costs of raw materials with the need to raise prices.

“Trade and cashflow also remain significant challenges for businesses. As we progress through 2021 it is likely that the Government funded Covid-19 relief packages will be phased out and businesses will need to keep a watching brief on cash outflows as they try to build resilience.

“As the first survey since the end of the Brexit transition, it has shown that around half of firms are finding the new arrangements difficult to work with and are impacting on trading relationships between NI and Great Britain.

“Although companies will continue to navigate the complexities of the new arrangements, many are working to identify potential opportunities that are available to them because of Northern Ireland’s new and unique position. Exploring new markets and adapting their offering is the type of strategic and innovative thinking we have seen from the business community and is just what we need to ensure future prosperity.”