Jim Power - Chief Economist

‘ REALISING THE FULL POTENTIAL OF SMALL BUSINESS FOR ENTERPRISING DONEGAL BUSINESS WEEK 2011 Jim Power March 7th 2011

GLOBAL ECONOMIC BACKDROP
Global economic momentum solid
Developing economies showing strong momentum, particularly China
US – reasonable recovery, issues with consumer & fiscal deficit, but getting better
Europe – Germany doing very well, but sovereign debt issues casting a shadow
UK – reasonable growth momentum- but fiscal retrenchment now beginning to impact
Inflation fears growing in Euro Zone & UK ~ interest rates to rise
Risks are Fiscal Consolidation, Oil Prices & Banking Problems

GLOBAL GROWTH FORECASTS Source: Capital Economics 2009 2010 2011f 2011f World -2.0% 3.4% 2.8% 2.3% G7 -3.7% 2.6% 2.0% 1.4% Euro Zone -4.0% 1.7% 1.0% 0.5% Japan -6.3% 4.2% 1.0% 1.0% UK -4.9% 1.7% 1.5% 1.5% China 9.2% 10.3% 9.0% 8.5% India 7.4% 9.2% 8.4% 8.6% Australia 1.3% 3.3% 3.8% 3.6% United States -2.6% 2.9% 3.0% 2.0%

OIL PRICES (BRENT CRUDE)

IRELAND – WHERE IS THE ECONOMY TODAY?
Q1-Q3 2010 GDP -1.2% GNP -3.7%, but both expanded in Q3
Retail Sales Volume +0.9%, Value -2.0% (2010)
Car Sales +55% in 2010 so Retail Sales ex-Motor Trade Value -4.3%, Volume -1.8% ~ weak January as USC hit
Manufacturing Output 2010 +8.4%; Modern +11.1%, Traditional +2.0%
Merchandise Exports +6.9% Imports +0.6% (2010)
Credit availability very difficult
Labour market conditions difficult
Public finance crisis
But Indications that economy is stabilising after dramatic fall

MERCHANDISE EXPORTS (VALUE) Annual Growth (Jan-Nov 2010) Food & Live Animals +11.0% Beverages & Tobacco +11.1% Chemicals & Related Products +9.1% -Medical & Pharma Products - Organic Chemicals +14.4% +7.8% Machinery & Transport Equipment -20.7% -Office Machines & data Processing -30.9% Dairy +27.1% Meat & Meat Products +9.3% Total +5.8%

STATUS OF IRELAND TODAY
Emerging from deepest recession in our history
Public finance crisis
Banking crisis
Employment crisis
Domestic demand subdued – business investment weak, consumer confidence very fragile
Exports growing strongly
Manufacturing output growing strongly
External intervention was inevitable and ultimately positive
Challenging road ahead

PERSONAL CREDIT (YOY)

NON-FINANCIAL CORPORATE SECTOR CREDIT (YOY)

REAL CONSUMPTION OF GOODS & SERVICES

GROWTH IN REAL DISPOSABLE INCOMES

PRESSURE ON THE IRISH CONSUMER
Difficult labour market
Wage cuts
Sharp increase in personal taxation
Cutbacks in government expenditure
Destruction of personal wealth
Massive loss of confidence but
Sharp jump in precautionary savings
Lots of hard work before consumer confidence will recover
Consumers cutting back on discretionary spending

CONSUMER CONFIDENCE (ESRI/KBC)

WHAT IRELAND NEEDS TO DO
Restructuring of public finances has to continue – Government cannot succumb to pressures – need to create sustainable public finances
Public sector needs to improve effectiveness
Banking crisis has to be sorted – will be slow & expensive – but little choice – debate about new banking model needed
Competitiveness agenda has to be pushed onto Dail agenda
Personal debt issues will need to be addressed – but no easy solution
Success cannot be regarded as a sin
Growth is the only way to solve various crises, but painful medicine has to be taken first

THE ECONOMIC REALITIES
Despite Government efforts the challenge is immense
€ 190 bln national debt by 2014, €9 bln interest bill ?
Fiscal correction €30 bln 2008-2014
Is this manageable?
Are there options?
Populist notions gaining currency
Ireland will have to proceed with EU agreement
Unilateral approach not an option
EU will have to respond more forcefully to Euro Zone crisis

PRIORITIES FOR FIRST 100 DAYS
Provide forceful leadership
Appoint strong cabinet based on ability rather than politics
Change ministerial profile
Engage constructively with Europe on Irish realities
Commitment to fiscal objectives
Concerted effort to repair tarnished international reputation

REASONS TO BE CHEERFUL?
International background much better
High level of personal savings – precautionary savings driven by lack of confidence
Recession has been used to make the economy more competitive – but there is still a long distance to travel
Still many ‘real’ entrepreneurs and risk takers in Ireland – we must not drive them out
Reform of way in which public services are delivered
Opportunities presented by a decent crisis should not be wasted

SOME PERSPECTIVES ON BANKING
Model is dysfunctional – what sort of model should we aspire to?
Depositor confidence shattered
Full extent of black hole not yet obvious
Sale of AIB & BOI to foreign bank – if possible?
Creation of third force from the rest
Need for ICC type institution?
Profit maximisation as the key driver?
Incentivisation structures?

SECTORAL CONSIDERATIONS
Export sectors holding up well
Construction industry will remain weak ~ but long-term requirements exist
Financial services industry in serious flux
Hotel sector – serious over capacity
Retail sector – over capacity/difficult consumer outlook
Agri-food has potential, but challenging environment
Professional services offer potential
Personal services offer potential
Alternative energy has potential
FDI model under pressure

BARRIERS TO ENTREPRENEURSHIP
Cultural issues
Red tape & regulatory burden ~ need to achieve quality regulation & reduce costs of compliance
VAT regime
State costs – commercial rates, local authority charges, cost of employment
Other business costs – professional fees, energy, commercial rents, IT costs, insurance
Credit

Any Questions?

Jim Power - Chief Economist

by Donegal County Enterprise Board on Mar 08, 2011

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