North in grip of chill as house prices fall and jobless rise

US/Northern Ireland Investment Conference:As key elements worsen, the North still lags the UK in gross value added, writes Francess McDonnell

NEW CAR sales have slumped in Northern Ireland, house prices are falling and the unemployment rate is creeping up.

All the signs point to a definite chill and economists are warning the temperature is likely to fall further before the economic climate improves.

This time 12 months ago, it was a very different scenario in the North - house prices had risen to record levels, luxury cars were in demand and the construction boom had created a jobs splurge.

Richard Ramsey, Northern Ireland economist with Ulster Bank, says 2008 is going to be very different and it is shaping up to be a very challenging year for the economy.

Throughout the 1990s, the North enjoyed one of the fastest economic growth rates of any region in the UK. But Mr Ramsey says that, despite the progress that has been made, Northern Ireland still fails to impress when it comes to one of the most common measures of economic prosperity - gross value added per head.

"This has been around 81 per cent of the UK average for the last 10 years - what this really means is that Northern Ireland has had a consistently low rate of productivity and a high rate of economic inactivity," he added.

The latest government figures suggest there are about 35,000 people registered as unemployed - but more worrying is the growing number of people described as "economically inactive" in the North. According to the statistics for the period December to February 2008, there were 541,000 people in this category.

Michael Smyth, senior lecturer in economics at the University of Ulster, says that despite the rise in the number of people claiming unemployment benefits, there is also a record number of people in work in the North.

In the First Trust Bank's Economic Outlook and Business Reviewpublished this month, Mr Smyth states: "The Northern Ireland labour market remains something of a paradox as the rate of economic inactivity at 27 per cent is much higher than the UK average of 21 per cent.

"This relatively high rate of economic inactivity reflects Northern Ireland's unique set of demographic and social conditions as well as the distorting effects of the national social welfare system."

He believes unemployment will continue to rise in tandem with much slower economic growth in the North.

But Mr Smyth says the North's relative dependence on public expenditure will continue to help cushion most people in Northern Ireland against the worst effects of a period of economic turbulence.

But while the North may escape a full-blown recession, the slowdown in consumer spending and the impact of a steep rise in the cost of living - including food and energy prices - is damaging economic confidence.

According to the Society of Motor Manufacturers and Traders, new car sales fell in the important plate-change month of March by more than 11 per cent.

Philip McDonagh, chief economist with PricewaterhouseCoopers in the North said the current economic situation is not going to improve any time soon. But he believes that, because of the level of public spending already committed to Northern Ireland, there will be some level of growth in economy.

He warns that because public spending is also getting squeezed, the North's economy is not as well-insulated as it would have been in the past. "There are a lot challenges ahead for Northern Ireland - we need to grow our tourism sector. We need to attract companies who will create new added-value jobs and we need to address our old structural weaknesses, including the dominance of the public sector - which accounts for 60 per cent of our gross domestic product in Northern Ireland."