IMPENDING PUBLIC sector and welfare cuts are likely to undermine any modest recovery under way in the North and reduce growth rates to less than 1 per cent this year, a key local bank has warned.

Latest economic research from the Northern Bank suggests the local economy will grow at just 0.8 per cent, a downward revision from the 1 per cent it previously forecast.

In its quarterly sectoral forecast report published today the bank claims Northern Ireland has only a “20 per cent” chance of falling back into recession. But it also warns that the North’s economy is unlikely to bounce back to its pre-recession healthy position soon. Angela McGowan, Northern Bank’s chief economist, said she believed the region had the potential for sound economic growth in the long term. But in the immediate future growth would be weak.

Ms McGowan believes Northern Ireland will face a major challenge adjusting to the “new equilibrium” that the drive to achieve a more balanced public/private sector will deliver.

Northern Bank has indicated that it expected the strict austerity measures set out in the last British budget to improve public finances will have a positive long-term effect. But the bank, which itself has struggled in the local economy, has predicted the British government’s strategy could result in job losses in the short term.

Ms McGowan said: “The budget that was delivered in June was particularly hard on the Northern Ireland economy given it targeted public spending and welfare benefits. The local economy, which is currently very dependent upon the public purse, will naturally find this adjustment to reduced state support particularly challenging.”

The report also stresses some sectors are likely to outperform other industries.

The North’s construction sector and related industries are continuing to contract but sectors such as business services and retail and distribution – not withstanding the planned VAT hike – are expected to show positive growth rates for the rest of this year.

Ms McGowan added: “The sharp falls of late 2008 and early 2009 appear to be over for the manufacturing sector, and although building supplies and construction-related manufacturing remain muted, those sectors such as food production, electronics and pharmaceuticals continue to provide strength.”