Economic Outlook and current state of theNorthern Ireland EconomyAngela McGowanChief EconomistNorthern BankPrepared November 2011
Current state of NI economy• The Bigger picture:• - Global / European crisis• - UK economy• SWOT analysis for NI economy• Headline indicators• Economic outlook• Discussion - making choices
Global recovery 4% per year – long period of slow growth:Extra hit from the recentfinancial shock – long-term damageBUT we expect somerebound in Q4 from: - low inventory levels - lower oil and food pricesWest is trapped in low growthand elevated unemploymentrates – Emerging mks – 6%growth
The Global Picture .....• Headwinds from early 2011 (oil and food price shock / Japanese earthquake and Chinese policy tightening) starting to fade. But Aug/ Sept financial shock took its toll.• There will be long-term damage from the shocks to the global economy this year. The job engine has not started and we now face significant policy tightening in advanced economies.• As a consequence, central bank rates in the US, Europe and Japan will be kept low for the foreseeable future.
We do not expect a global recession but Europe is a highrisk and is expected to contract for at least one quarter.• We don’t believe the Q3 shock was big enough to trigger a GLOBAL recession (but another hit of 10-15% wuld do it)• But – it will have an impact upon business and consumer behaviour in Q3 - inventories will be cut • - investment plans postponed • Consumers will probably spend lessRemember:- many headwinds are turning into tailwinds and will pull growth upward- Interest rates will provide some support
But risks remain high around the Eurozone:• European crisis is the biggest risk at moment.• This week markets will focus on: - Greece – will it pass the austerity package? - Italy - negotiations over potential pension reform are expected to continue. Risk of a government reshuffle in Italy remains in focus.• At the ECOFIN meeting (today), the Ministers of Finance will “discuss the follow-up to the decisions taken” at the EU Summit.• Markets would like a lot more detail to reduce uncertainty
The Worst case scenario The good alternative• This scenario centres on a further - European leaders would make appropriate worsening of sentiment in the interbank moves - to restructure Greek debt / markets. recapitalise banks etc √√• A tightening of credit standards and - Growth and risk sentiment would improve drop in asset prices would result in markedly on the back of a strong turnaround in the global manufacturing cycle – with slowing production /rising U and a drop China leading in investments and consumption - China would be willing to support the• - another global financial crisis would European Financial Stability Facility. lead to recession in the Western economies and dampen growth in Asia. - US continues to recover.• The impact on the real economy would - The interbank market normalises be very severe – particularly in the Euro area – with no room for a fiscal response.
Debt levels have an impact on a country’s ability to borrow
Current state of play• The ECB cut its key policy rates by 25bp. (downside risks to economic growth -forecast a mild European recession).• Will probably cut its key rates another 25bp in December.• The relief that followed after the EU summit last week was short- lived - market is not happy about the lack of detail in the comprehensive package.• Market sentiment could worsen - but if Italy commits to reforms +G20 delivers a constructive solution + Greek salvage gov’t - all this could be positive for this week.• Unfortunately, none of these events will be a permanent game changer.
Data suggests UK recovery is still struggling..............UK – Recovery stalling Unemployment levels risen to 8.1% UK : THE PRESSURE IS ON - labour market flexibility After 0.1% growth in Q2, ONS estimate Q2 0.5% but -UK in trouble before EU crisis took holdProblems remain: Austerity already having an impact on domestic spending Europe – potential impact for Exports and bank exposures Inflation still high (5.2% – Sept11)
UK Exports are the only thing holding up.........
The outside impact on Northern Ireland?• UK Austerity will have GVA growth (%) some impact on local public 6.0 spending – but also huge NI 4.0 impact upon confidence. UK European crisis – again an 2.0• impact upon confidence 0.0 Q1 2006 Q3 2006 Q1 2007 Q3 2007 Q1 2008 Q3 2008 Q1 2009 Q3 2009 Q1 2010 Q3 2010 Q1 2011 Q3 2011 Q1 2012 Q3 2012 % /investment and potential to -2.0 hit exports. -4.0• Unemployment risen -6.0• Access to finance impact -8.0
Northern Ireland Economic Overview: weak growth ahead and potential for rising unemployment levels is high Since emerging from recession Revisions to sickness benefit could have huge impact in late 2009, Northern Ireland is also experiencing a very weak recovery The indicators suggest a sluggish labour in terms of job creation but//unemployment is now at 7.6% (8.1% in UK and 14.4% in RoI) A fall back into recession cannot be ruled out (probability estimated to be in the region of 25%) Source: Oxford Economics & Northern Bank August 2010
Consumer confidence and demand collapsed! Sept 11
SWOT analysis for NI economystrengths weaknesses • Low productivity• Infrastructure • Small private sector• Young population • Smallness*** - economies of scale /• Good education system (top) - regional restrictions – taxation• World–class universities Recovering from a housing bubble • Large tail of underachievement• Smallness /access*** • Youth unemployment levels• English Speaking • Economic and social exclusion – LTU• History of Industrial success • Skills gap / innovation • No growth of knowledge economy • Export / R&D / clusters / start-up• Political ethos – democratic levels and value equality • Education system – elitist / creativity
SWOT analysis for NI economyOpportunities Threats• University research – • Global downturn more spin offs • Unemployed youth (18%)• International goodwill / • Austerity measures Diaspora • Subvention £9billion• Growing demand from • LT Energy supply and cost Emerging Markets • Political resistance to raising• Connectivity with RoI and local revenue streams: rest of UK • - water / rates / health• More partnerships PPPs service• Taxation autonomy
Employment in the knowledge economy as % of totalemployment (NISC CONNECT report 2011)
Business start-ups per 100,000 of the population in the UK
Discussion - making economic choices• Q: What does society actually want?• levels of taxation V levels of public spending ?• intervention V free market ? somewhere in between? Regulation – how much? Where? – environmental / financial / etc Regional economic dependence V Independence• Where should our job creation come from? • – local enterprise and new firm start-ups? • - Foreign investors? • - mixture of both? - Low or high risk economic strategy? Middle ground? Economics is about optimum use of available resources - but we still need to make choices according to social consensus. (e.g current school system)• HOWEVER - for that decision making we need better information - we need to know who will benefit? What is the cost? Who will carry the risk ? What are the alternatives?• - Who is responsible for getting us there – politicians / private sector – social partnership consensus approach?
For up-to-date info check out the website:www.northernbank.co.uk/economy