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Can Northern Ireland secure a more prosperous future?



Northern Ireland is battling tough odds to reverse decades of economic underperformance, as political uncertainty, fallout from Brexit and civic unrest heap fresh challenges on the region at its centenary. 

Leaders of Northern Ireland’s three biggest political parties said the region created from the partition of Ireland on May 3 1921 could now boost prosperity through initiatives such as taking control of its corporation tax rate, educating children from all its communities together, and making long-term infrastructure investments.

By almost every measure, Northern Ireland is starting from a low base. A research paper published by economists at Trinity College Dublin in 2019 charted decades of inadequate spending on education and infrastructure, a failure to attract inward investment, and a largely one-way flow of talent from the region.

The result has been economic underperformance relative to the UK and the Irish Republic for much of Northern Ireland’s first century, despite massive subsidies from the British government and a surge in state jobs in areas such as defence and security.

Bar chart: Average annual growth in real GDP per capita (%)

This spending was necessitated by the troubles: sectarian violence over more than 30 years that pitted largely Catholic nationalists who wanted a united Ireland against mainly Protestant unionists who aimed to keep the region in the UK. More than 3,500 people lost their lives until the 1998 Good Friday Agreement brought peace to Northern Ireland.

“We had . . . years of violence, a terrorist campaign, which of course was going to have an impact on the infrastructure . . . but despite all of that we are a very resilient bunch,” Arlene Foster, Northern Ireland first minister and leader of the Democratic Unionist party, told the Financial Times, speaking shortly before she announced plans last week to step down.

Although terrorism weighed on Northern Ireland’s economy, its slide was most pronounced in relative terms between 2010 and 2016, when growth in gross domestic product per capita averaged 0.6 per cent each year, compared with 1.3 per cent in the whole of the UK and 3.2 per cent in the Republic, according to data cited in the Trinity paper.

By 2018-19, the region’s spending exceeded its tax revenues by £9.4bn, a gap that equated to 19 per cent of GDP and was made up by the UK government.

Arlene Foster
Arlene Foster: ‘We had . . .  years of Ireland’s terrorist campaign, which, of course, was going to have an impact on the infrastructure . . . but despite all of that we are a very resilient bunch’ © Liam McBurney/PA

Foster’s departure, largely prompted by her handling of Brexit, comes less than 18 months after devolved government was restored at Stormont, and threatens to intensify political and economic uncertainty generated by the UK’s departure from the EU.

But Steve Aiken, head of the Ulster Unionist party, said Northern Ireland’s legacy of underperformance amplified future opportunities. “There is such an appetite for improvement and to make it work,” he added. 

Northern Ireland’s high levels of public sector employment have cushioned the coronavirus pandemic’s blow to its economy relative to the rest of the UK, and Irish Taoiseach Micheál Martin is enthusiastic about the potential for increased north-south co-operation in several areas including research.

Still, Northern Ireland operates under big constraints. Conor Murphy, finance minister and leading member of Sinn Féin, said he and his counterparts in Scotland and Wales pressed for multiyear spending settlements from the UK government in 2020. “Then, you get abrupt notice that it’s only one year [of spending] . . . so in that circumstance you can’t really operate in a long-term strategic way, ” he added.

Bar chart: Public sector deficit per person, 2018-19 (£, at 2019-20 prices) showing the gap between tax revenues and spending in Northern Ireland is the largest per head in the UK

Brexit is unleashing headwinds. Many businesses are grappling with rising costs and frictions as a result of Northern Ireland’s new trading arrangements with Great Britain under the UK’s withdrawal treaty with the EU. Fierce unionist opposition to the framework spilled on to the region’s streets in eight nights of unrest during April, and images of police deploying water canons against protesters were beamed all over the world.

“I think [Northern Ireland] will probably continue to underperform,” said John FitzGerald, co-author of the Trinity paper and former chief economist at Ireland’s Economic and Social Research Institute, a think-tank.

His and others’ research found that education has been the biggest barrier to Northern Ireland’s prosperity: the result of policies segregating Catholics and Protestants at school along with lower spending, as funding was consumed by defence and housing. 

Aiken said he expected education for both communities to be combined within a decade, which would greatly improve efficiency. Foster wants the same thing but said the timeline could be challenging since there were a “lot of vested interests” in keeping them separate. 

Line chart: Claimant count measure of unemployment (%) showing the unemployment rate in Northern Ireland has mainly exceeded the UK

Either way, reforming education and getting those children into the workforce will be a slow burn. FitzGerald’s more immediate fix is wooing back people who have left Northern Ireland, including students forced out by university caps that can leave just 60 places for every 100 domestic applicants, according to Queen’s University Belfast. Two-thirds of those who depart Northern Ireland for education elsewhere do not return, recent research from Pivotal, a think-tank, found.

FitzGerald thinks there is even less chance of emigrants returning now. “Who would want to go back to a Northern Ireland which is unsettled, which doesn’t know where it’s going?” he asked, saying society was “more divided” amid a polarised debate about whether Northern Ireland’s future lay within the UK. Brexit has fuelled calls for a border poll to bring about a united Ireland.

Others said Northern Ireland had been much more volatile and polarised in the past.

When Newry & Mourne Enterprise Agency set up a business park 50 metres inside the Northern Ireland border, almost all its outlay was covered by an EU grant because it was seen as “bandit country”, said chief executive Conor Patterson. 

Conor Murphy, Northern Ireland finance minister
Conor Murphy, Northern Ireland finance minister says ‘you can’t really operate in a long-term strategic way’ © Brian Lawless/PA

But 20 years later, the business park is full. “The place is busy and the businesses there don’t seem to be encumbered by the pandemic or by Brexit,” said Patterson.

Paddy Hughes, who runs equine products business Horse First on the business park, said he had been busier than ever in the past year, although he was dealing with extra costs including leasing more warehouse space because he had to order supplies in bigger batches owing to the post-Brexit trading arrangements.

Corporate leaders north and south of the Irish border said Northern Ireland could win business by embracing its unique position of in effect being in both the UK and EU internal markets for goods.

Stephen Kelly, head of trade body Manufacturing Northern Ireland, said this year he had been contacted by five companies considering investments in Northern Ireland, including one that could create 500 jobs. “I’d spoken to about four companies in the previous eight years,” he added. “Clearly [Northern Ireland is] being noticed.”

But a senior executive at a large multinational that has spent billions in Ireland, and who could see advantages in Northern Ireland’s post-Brexit status, said the relentless negativity of Stormont messaging surrounding the new trading arrangements was one of the reasons the region was uninvestable. 

The British government’s recent decision to increase its corporation tax rate from 21 per cent to 25 per cent by 2023 is another challenge for Northern Ireland, as it competes with the 12.5 per cent on offer in the Republic.

Foster said it was time to “revisit” taking control of Northern Ireland’s corporation tax rate, and suggested a figure of less than 20 per cent. Murphy is less keen, and saw more potential from long-term infrastructure projects that could be paid for with grants from Westminster.

Progress can be hard fought in Northern Ireland, where political leaders could not even reach agreement on commissioning a stone in the shape of the region to commemorate Monday’s centenary. “We are in a mandatory coalition,” said Foster. “And we recognise that . . . there are huge challenges around that.”

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Large-cap US stocks with high ETF ownership have underperformed




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Large-cap US stocks favoured by exchange traded funds have underperformed the wider market in recent years, raising fears that “crowding” in popular companies is damaging returns.

Analysis of the constituents of the S&P 100 by Vincent Deluard, global macro strategist at StoneX, a New York-based brokerage, found that since 2018 the stocks most owned by ETFs have tended to perform worse that those more lightly held by such funds.

Moreover, this negative correlation “has been getting stronger in the past three years”, Deluard said, “which I find interesting and possibly consistent with the view that a high ETF ownership depresses future returns by pushing up valuations”.

If that thesis is correct, then “the best opportunities to compound wealth should therefore be found outside of popular funds and indices,” he added.

Deluard’s research adds some credence to the arguments of some value investors that the rise of ETFs is just the latest example of “the madness of crowds” and that price-insensitive index funds create “passive bubbles” by piling into the same momentum-driven stocks, only for these bubbles to then burst.

The booming global ETF industry has seen its assets almost double to $9tn since the end of 2018, according to figures from consultancy ETFGI, with the bulk of this money both in the US and in equities.

Simultaneously, there has been a partial shift from broad market capitalisation-weighted ETFs — which pump money into every stock in an index in line with its pre-existing size — to narrowly focused thematic ETFs and those investing on the basis of environmental, social and governance factors.

The assets of thematic ETFs have tripled since the end of 2018 to $382bn, according to ETFGI, while those of ESG ETFs have risen ninefold to $246bn over the same period.

This has fed suggestions that ETFs have evolved from attempting to passively reflect stock markets to actively shaping them, distorting prices of particular companies as an ever larger share of money flows into favoured “ETF darling” stocks.

However, the data from StoneX suggests that the opposite may be happening, with unfavoured stocks seeing stronger gains.

Deluard found that ETFs’ share of ownership ranges from 4.1 per cent to 11.2 per cent for the 100 largest US stocks.

ETF ownership and return

The 10 stocks most lightly owned by ETFs include five that have more than doubled investors’ money over the past three years: Morgan Stanley, T-Mobile US, Deere & Co, Amazon and Tesla, the latter with an outsized 820 per cent total return.

Apple, Alphabet and Facebook are in the same quadrant.

In contrast, the stocks most favoured by ETFs include a disproportionate number of weak performers, such as Gilead Sciences, Chevron, ExxonMobil, Intel and 3M, alongside a smaller number of strong performers such as chip designers Texas Instruments, Qualcomm and Lam Research.

Deluard played down the importance of his findings to some degree, saying the negative correlation between the level of ETF ownership and performance was statistically “weak” and that relative sector performance “has been the main driver” of returns.

Although there has been high profile coverage of some tech ETFs, the ETF industry as a whole tends to be underweight technology stocks, something he attributes to a meaningful block of stock typically being locked up in founders’ stakes and employee ownership, leaving less for outside investors.

Similarly, despite the rise of ESG ETFs, the industry at large is still overweight oil companies such as Chevron and ExxonMobil, which are favoured by value and dividend ETFs.

Comparable analysis Deluard conducted into the 2012-2018 period found a weaker, though still negative, link between ETF ownership and performance.

Nevertheless, even if his findings can be attributed to a statistical quirk, there is at least no evidence that rising ETF ownership is distorting the market by pushing up the prices of ETF darlings at the expense of unloved and overlooked stocks.

Deluard does not, though, rule out the possibility ETFs might be pushing up prices of small or mid-cap stocks that are less able to absorb strong ETF inflows, such as those in popular fields like gold miners or cyber security companies.

“Passive distortions are likely much greater for small caps whose limited float can be overwhelmed by index funds’ relentless buying,” he said.

Peter Sleep, senior portfolio manager at 7 Investment Management, cautioned that Deluard’s findings could vary somewhat if they were based on free-float market capitalisation, omitting founders’ stakes from the calculation.

On this basis, ETFs would own a higher percentage of technology companies’ shares, reducing the tendency for lightly held shares to have performed better.

Overall, though, Sleep welcomed the findings saying “I think it’s a good thing. You often hear people say that the market is only going up because of ETFs,” an argument the analysis undermines.

Todd Rosenbluth, head of ETF and mutual fund research at CFRA Research, said the findings ran counter to what he would have expected, and possibly signified ETF darling stocks first witness an unsustainable rise, followed by a reversion to the mean.

“There have been two narratives out there,” he said. “One is that too much money is going into ETFs and thus they are driving the car, and stock prices are being dragged along with them. This seems to disprove that,” Rosenbluth said.

“The second is that people will pile out of these [ETF darling] securities and the stocks will fall.”

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Biden faces tough path to US economic recovery




Joe Biden is grappling with a messy and unpredictable economic outlook as the twin threats of rising inflation and slow jobs growth shake confidence in the steadiness of the US recovery from the pandemic.

The US labour department this month reported that the pace of job creation slowed significantly in April, fuelling concerns of widespread discrepancies in the labour market.

It followed up that report with figures published last week showing an unexpectedly steep jump last month in its consumer price index, compounding fears of mounting inflationary pressures.

The data have exposed Biden to sharper criticism of his economic management from Republicans and rattled hopes of a smooth rebound from the coronavirus crisis on the back of hefty fiscal stimulus and quick vaccination rollouts.

The US has driven the global economic recovery, with the IMF predicting gross domestic product growth of 6.4 per cent in 2021.

“There are a lot of signs of a resurgence in aggregate demand — an economy that’s recovering, but that recovery is going to be chaotic,” said Wendy Edelberg, director of the Hamilton Project, an economic think-tank at the Brookings Institution. “And yes, really difficult to manage.”

Senior Biden administration officials have cautioned against drawing too many conclusions from one month’s data. They argued that average monthly job creation over the past three months has still been much stronger than in the previous quarter, that the inflation bounce is likely to be transitory and that the recovery remains firmly on track.

But they have also acknowledged high levels of economic uncertainty at a time of big shifts in spending patterns and employment trends, and as health-related restrictions are being lifted across the country more rapidly than predicted — partly because of the pace of the country’s vaccination campaign.

“There’s going to be a period, as supply starts to equal demand and sectors are healing and recovering, [during which] there’s going to be some choppiness,” Cecilia Rouse, chair of the White House Council of Economic Advisers, told reporters on Friday.

“We know that the mismatch between different parts of the economy will show up in unexpected ways until the economy more fully recovers. As the president urged earlier this week, we must be patient,” she added.

Critics of the administration’s economic policies — ranging from former Democratic Treasury secretary Larry Summers to Republicans on Capitol Hill — have seized on the latest data to argue that the Biden administration has recklessly dismissed the risks of excessive fiscal stimulus, and played down the economic warning signs.

“I was on the worried side about inflation and it’s all moved much faster, much sooner than I had predicted. That has to make us nervous going forward,” Summers wrote on Twitter on Friday.

“I think there’s a decent chance that this works out fine. And that we just have a super rapid recovery and a great year,” said Michael Strain, director of economic policy studies at the American Enterprise Institute, a conservative think-tank. “I think there’s also a chance that this could end really poorly.”

Other data releases last week failed to clarify the picture. The University of Michigan’s consumer sentiment index showed rising long-term inflation expectations, while retail sales were flat last month after a big jump in March. On the brighter side, weekly jobless claims out on Thursday dropped to a low point for the pandemic.

Cecilia Rouse
Cecilia Rouse said: ‘There’s going to be a period, as supply starts to equal demand and sectors are healing and recovering, [during which] there’s going to be some choppiness’ © Reuters

At this stage, there were no signs from the White House of any big changes to Biden’s policy agenda to address the emerging economic picture. On the labour market front, the president moved to enforce a requirement that citizens who were offered “suitable” jobs not be eligible for unemployment benefits, and Rouse said the White House was reminding businesses of a tax credit for employee retention set up as part of its stimulus programme.

The White House is sticking by the fiscal support it has enacted with the help of congressional Democrats not only to stoke the country’s recovery but also to help low-income families. It has also pointed to its confidence in the Federal Reserve to manage any rise in inflation.

But Republicans and conservative economists have called for more dramatic action to cool the economy, such as an early end to federal unemployment benefits, which Republican-led states across the country have refused to pay.

Meanwhile, economists whose forecasts were badly wrecked by the data released in recent days warned that any assumptions about the US recovery — let alone policy changes — may well have to be revisited.

“We’re in such an uncharted territory,” said the Hamilton Project’s Edelberg. “When you’re talking about the changes in aggregate demand that we’re experiencing, and changes in supply that we’re experiencing — whatever uncertainty you have about inflation in normal times, increase that by an order of magnitude.”

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Covid rules leave pubs and restaurants in England fearing the great indoor reopening




Before the pandemic, the tiny Sicilian restaurant Franzina Trattoria was loved by south London locals for its long communal tables. Customers would squeeze in and share food with people they had never met. Two diners, who were complete strangers, ended up getting married.

But as owner Stefania Taormina and her husband Pietro Franz prepare to welcome the first diners since December back into their 4-metre-wide eatery in Brixton on Monday, Taormina fears they may not return.

“We don’t see many bookings inside [and] it’s a bit scary. We think people are thinking differently now and sharing tables is maybe a problem,” she said.

To comply with Covid-19 restrictions for hospitality businesses in England when the government allows them to open indoors from Monday, Taormina has cut the number of guests seated in the restaurant from 55 to 14 and spent £1,000 on plastic dividers to break up the tables.

The saving grace has been the six two-person tables on the restaurant’s outside terrace, which have been booked all hours of the day since restrictions on outdoor eating and drinking were lifted in late April. “We are breaking even just about with the terrace open,” she said. “I think people still prefer to go to places outside.”

The pandemic has left the hospitality industry facing a crisis of historic proportions. Since the pandemic struck, UKHospitality, the trade body, estimates the sector across Britain has lost £80.8bn in sales between April 2020 and this March, compared with the previous 12-month period, equivalent to £9m every hour.

Line chart of like-for-like hospitality sales compared with 2019 (% change) showing pub and restaurant sales have plummeted during the pandemic

More than 8,500 of the UK’s 115,100 licensed premises have gone out of business. And only a third of those operating have the outdoor space that has allowed them to reopen since the government allowed alfresco dining from April 12.

Even as the rest make ready to open inside in the biggest easing of restrictions in England since lockdown was imposed in January, many pub and restaurant owners fear the remaining Covid rules — waiter service only at tables that must be at least 1m apart, with a limit of six people from no more than two households — will make most establishments unprofitable.

“The vast majority of our pubs will be trading on May 17 [but] I expect us still to be trading at levels where we will be making a loss,” said Andy Spencer, managing director of Punch Pubs, which owns 1,100 premises. He said that pubs would run at half their usual capacity and that the restrictions were “challenging, time consuming and expensive”.

Key to profitability for most pubs and restaurants is the removal of all social-distancing rules, and many owners were buoyed by recent comments from Boris Johnson. At the start of this week, the UK prime minister raised the possibility that all restrictions could be lifted over the summer.

But by Friday, Johnson warned that the next state of England’s lockdown easing plans due on June 21 — when all existing rules are set to fall away — may have to be delayed because of a surge in infections caused by the emergence a Covid-19 variant first detected in India.

Opening with extensive restrictions in place has presented other challenges, not least the need to train staff who have been furloughed for months.

Pedestrians walk past a PizzaExpress restaurant in central London
PizzaExpress’s 6,000 staff have had a week of ‘full immersion’ training in both hygiene measures and service © Tolga Akmen/AFP/Getty Images

Zoe Bowley, managing director of PizzaExpress, said the chain’s 6,000 employees had undergone a week of “full immersion” training, both in hygiene measures and service. “Some of our team members, apart from a small gap in November, haven’t worked for a year,” she said.

The sector also faces a labour shortage with a loss of experienced and qualified staff, partly due to the pandemic and partly due to Brexit, with EU workers returning to their home countries.

This will add to the pressure on employees facing customers for the first time in months. “They are rusty after furlough for a year and are heading back to jobs where they will have to cover other roles because there aren’t enough staff to cope,” warned Mark Lewis, chief executive of the charity Hospitality Action.

Another common fear is antagonising guests by insisting they comply with the Covid regulations, such as checking in with the test-and-trace app and wearing a mask when moving around.

Even if reopening goes as planned, the absence of foreign tourists and commuters for at least part of the summer — with international travel still heavily restricted and office staff encouraged to continue to work from home until at least late June — is expected to leave many city-centre establishments short of customers.

Anna Sebastian, manager of the Artesian bar at London’s Langham hotel
Anna Sebastian, bar manager of the Artesian at London’s Langham hotel, said ‘normality won’t be restored’ until tourists return in large numbers © Charlie Bibby/FT

“We’re very dependent on footfall from tourists shopping on Oxford Street and hotel guests, so until they return in large numbers, normality won’t be restored,” said Anna Sebastian, bar manager of the Artesian at The Langham hotel in London.

If there is a positive to have come out of the crisis, the pandemic has forced the industry to accelerate the adoption of technology that has improved productivity: payment and ordering apps allow operators to turn tables faster and employ fewer staff.

Customers using apps also tend to spend more per head having had more time to peruse the menu and the ability to order as and when they want, according to several pub and restaurant owners.

But Bowley warned there was a “fine balance” to strike to make sure that an industry built on personal service did not become “faceless” just as it needed customers to return.

Technology aside, Spencer said he feared that until sports and live music could restart and customers could stand up in crowded bars, the pub experience would be a “sanitised” one. “We have taken out a lot of the soul . . . and a lot of the things that make the pub really special,” he said.

It is the same pre-Covid conviviality that Taormina fears will be lost at Franzina Trattoria. “It was a joy for me because you would see people who you had never seen in your life start to drink together and talk about food together and then sometimes they would go out together afterwards . . . I am scared that it will not happen again.”

Additional reporting by Oliver Barnes

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