During the past three months, evidence of the general economic slowdown has accumulated in Northern Ireland (NI). Industrial output weakened further, particularly in the depressed textiles sector. Consumer confidence weakened, house prices fell and the level of new housing starts declined. Business confidence remained fragile across all sectors. Without doubt some of relative gloom was prompted by developments in the Middle East, to say nothing of the twists and turns in the NI peace process.

These rather downbeat developments were accompanied by an equally downbeat UK Budget. The best that can be said about Chancellor Gordon Brown's latest package is that it reaffirmed the Government's commitment to substantial extra financial resources for health and education during the next five years. As far as NI is concerned, this means progressively larger increases in spending on health and education services between now and 2007-08.

Invest NI (INI) is Northern Ireland's new economic development agency, which was established in April 2002 under the Industrial Development Act. INI is a non-departmental public body to promote innovation and a more enterprising culture. INI's first annual report will be available later in 2003.
Looking to the medium to longer terms, there is both good and bad news to report.

On the positive side, public expenditure growth is now accelerating and will continue to do so for the foreseeable future. Public expenditure, whether we like it or not, is the most important driver of economic activity in NI. Hand in hand with this increase in public expenditure, goes the need to generate more tax revenues locally. Under the terms of the Reinvestment and Reform Initiative, if NI wants to borrow to finance much-needed infrastructural investment, then these higher levels of borrowing necessitate progressively higher tax revenues.

Higher local tax revenues imply higher domestic and business property taxes (rates). It seems likely that industrial de-rating will come to an end from 2006-07. New business rates revenues will make a significant contribution towards servicing the infrastructural borrowing, but they will do little to enhance the competitiveness of local industry. Such is the scale of the infrastructural deficit in NI that higher domestic rates will be required. It is likely that ratepayers will face hefty increases towards the end of this decade.

In addition, householders face the introduction of water charges from 2006. The NI Water Service has suffered from under-investment in the basic infrastructure for many years and it needs up to £3bn of capital investment to bring the system up to the standards set out in the EU Water Directive.

The governance context
In recent times there has been considerable discussion among policymakers and commentators about the extent of governance in NI. For example, in response to concerns expressed by representatives of the business community, research has been commissioned into the cost of doing business. This research covers issues such as energy costs, employers' liability insurance, the ending of business de-rating, the cost of compliance with government legislation and other NI specific factors. The results of this research and its policy implications are awaited eagerly.

The former NI Executive commissioned a review of public administration in NI to develop ways of "improving the effectiveness and efficiency of and accountability for, the administration and delivery of public services in NI". The review will probably bring forward proposals to de-layer and streamline central and local government structures. Undoubtedly, the quantity of public administration in NI is excessive and needs to be reduced, but there is evidence to suggest that NI's administrative systems also need reform. To illustrate the point, it is rumoured that there could be a public expenditure underspend of more than £400m for the fiscal year just ended. If this is true, it will not play well with the general public, at a time when some hospital trusts and schools are experiencing financial difficulties. Doubtless part of the explanation for this large underspend is the inability of the bureaucracy to take timely decisions. This may be due, in part, to excessive layers of decision making, but it is also caused by excessive rules, regulations and accountability checks on public expenditure decisions.

The forecast
Most of the available statistical evidence suggests that the pace of economic activity in NI has slackened in recent months. The fragility of some of the world's largest economies and increased levels of uncertainty have caused the general economic environment in NI to deteriorate. Industrial output fell back in 2002 Q4 for the second quarter in succession. Output in the textiles and clothing sector contracted by almost 10% in the three months to December 2002 and there have been a number of plant closures in the early months of this year. Textile output is barely two-thirds of its 1995 level. NI is following the broad cyclical movement in output in the national economy.

Consumer confidence appears to be one of the casualties of the increased uncertainty of recent months. New car registrations declined sharply during 2002 H2. Data for the first two months of 2003 show car sales running at about 10% below the level of 12 months ago, confirming the nervousness of consumers. However, the weakness in demand for new cars should be seen in the context of the boom years of the mid- to late 1990s.

The most striking difference between NI and the rest of the UK is to be found in the reported rise in input costs. Local companies reported a much more rapid escalation in input costs than their counterparts in the rest of the UK. Factors impacting include the stronger euro, higher insurance costs, higher fuel costs and higher wages in NI.

The above is an extract from the First Trust Bank Quarterly Economic Outlook and Business Review, which can be viewed at www.firsttrustbank.co.uk.

A copy of the Review may be obtained from David McFeeters, senior manager, business banking, First Trust Bank at [email protected].

Northern Ireland's technology centre

With headlines regarding the solvency of local technology companies recently attracting attention in the mainstream press, some might assume that local insolvency lawyers are more in demand than their colleagues in the information and communication technology (ICT) sector.

Behind the headlines, however, there is a steady stream of on-going corporate finance activity for companies working in the technology sector. While much of this finance raising is of a lower value, providing seed funding to start up ventures, there are typically a handful of higher value funding rounds on the go at any one time. These usually are for the success stories of the 'dotcom boom' that have managed to weather the storm following the general loss of confidence in the sector in 2000.

These businesses are enduring much closer scrutiny by funders and where primary funds are largely dissipated, much harsher commercial terms. However, as potential disposal proceeds for investee companies are not attractive to funders at present many funders are 'following their money' on successive funding rounds in the hope of brighter prospects in the medium term.

Notwithstanding this there is a sense in the market that there is currently a shortage of new high quality investment opportunities. Whether this is the cause or consequence, investors and government bodies are now being more discerning in their assessment processes and more restricted in the value of funds being advanced.

Companies with good product are finding they may have a choice of funding sources from small local venture capitalists (VC), mid-sized national VCs and national and European grant assistance, but this unfortunately does not assist research and development operations. To combat this, Invest NI, the local government development agency, has recently established the Nitech Growth Fund, to encourage the expansion of new research-based businesses in the technology and biotechnology sectors, particularly from the provinces' academic establishments.

With the reduction in a number of higher value corporate finance deals and with funding rounds becoming increasingly tough, ICT lawyers in Belfast are now finding the public sector an increasingly attractive alternative source of work. Whether acting for contractors/suppliers or local authorities/government bodies, IT procurement by the public sector is proving to generate legal work of good quality, which is also secure in a way that work for dotcom start-ups never was.

The dividend now being enjoyed by Belfast's leading commercial law firms through acting for numerous technology start-ups a few years ago is that they have now managed to establish sufficient knowhow and experience of the sector for local businesses to have their needs serviced locally, rather than needing to look to London as was the case in the past.

Mark Thompson is an associate with Arthur Cox.