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Presentation given by the Bank of Ireland’s UK economist, Alan Bridle, to more than 160 guests at a CBI lunch sponsored by the Bank of Ireland

Presentation given by the Bank of Ireland’s UK economist, Alan Bridle, to more than 160 guests at a CBI lunch sponsored by the Bank of Ireland

Published in: Economy & Finance, Business

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  • 1. The Regional Economy in 2012Balance Sheet Recession,Austerity & Growth Challenge Alan Bridle, UK Economist CBI Economic Luncheon 18th May 2012Bank of Ireland UK is a trading name of Bank of Ireland (UK) plc which is authorised and regulated by the Financial ServicesAuthority. Registered in England and Wales (No. 7022885), Bow Bells House, 1 Bread Street, London, EC4M 9BE.
  • 2. Agenda Scene-setting - Regional Exposures to UK & Irish Debt issues “Made in Northern Ireland” – our own Balance Sheet Recession as it plays out  The Business Sector  Property Markets  The Household Sector  Banking & Credit issues Short & Medium Term Outlook  Base case Planning Assumptions  Risks  Critical conditions for restoring growth Concluding Remarks  Rebalancing - The Real Challenge ?  Grounds for Encouragement?
  • 3. Regional ExposureSandwiched between two highly indebted economies that had oversized banking sectorsand both now set on a necessary course of “deleveraging”
  • 4. The UK’s limited “recovery” experience to date and scale of debt-reduction plansshould govern regional growth and public spending expectations for at least twoParliaments and inform current NI Executive policy-makingSource: FT, Why UK GDP continues to lag G7 (G Davies), 24TH April 2012
  • 5. A Heavily Indebted & Welfare-dependent Region having to play its part in restoring UK public finances NI public Expenditure per capita £bn relative to UK (£bn) Net Fiscal 12 Transfers 11 12,000 10 10,000 9 8 8,000 UK 7 6,000 NI 6 4,000 5 4 2,000 3 0 2003/04 2005/06 2007/08 2009/10 DEL + AME DEL only Claimants per 1,000 people DLA IB JSA IS NI 102 34 32 46 UK 54 32 23 29Sources: PESA, DFP, NOMIS, BOI estimates
  • 6. Rear view mirror reveals NI’s “recession experience” has greater similarity to ROIthan UK Annual Economic Growth in Real Terms 2007-2009 0 -1 Official ONS data released at the -2 end of 2011 indicates that the -3 -4 contraction in the regional economy -5 -6 was much deeper than previously -7 estimated. -8 -9 -10 Lon Sco UK SE SW EM NE Y&H NW Wales WM East NI ROI Estimated NI GVA at constant prices 1998-2010 £ bn In monetary terms, aggregate 30 29 regional income/expenditure was 28 27 estimated to be over £2.0bn or 7.5% 26 25 lower in 2010 v peak of £29.2bn in 24 23 2007 ie the size of the economy is 22 21 back at 2004 levels. 20 1998 2000 2002 2004 2006 2008 2010 The size of the NI economy overall is now back at 2004 levels Sources : ONS, CSO, BOI
  • 7. The Business Sector
  • 8. Key private sectors of the NI economy have experienced only a very modest recovery to date and activity levels remain c15% below pre-crisis peak … while 1 in 3 firms indicate they are not profitable NI Services,Manufacturing and Construction output indices All UK SMEs NI SMEs 115 2008=100 105 95 85 Services 75 Manufacturing Construction 65 55 Loss Profit q1 q1 q1 q1 q1 q1 q1 Broke even DK 2005 2007 2009 2011Source : NI Index of Services (Experimental), NI Index of Production, NI ConstructionBulletin, bdrc continental
  • 9. Growth Ambitions in 2012 – while near half of firms say they will stay the samesize in the next 12 months, a larger percentage of NI firms plan tocontract/sell/pass on than, than grow substantially. Growth plans for next 12 months All UK SMEs Q4 NI SMEs Q4 Source: bdrc continental, March 2012
  • 10. Current economic climate rated the biggest challenge to business growth in theshort-term. NI SMEs more exercised than UK overall by other factors, includingfinance availability Main reason for not seeking borrowing – All NI Major obstacle to running business in next 3 months “Would be seekers” Q3-4 only Main reason for not applying Discouraged: had asked informally but felt put off, or assumed would be turned down Principle: prefer not to lose control, or can get funds elsewhere Process: think it’s too expensive, too much hassle, needs security Climate: felt it was not the right time to All UK SMEs Q4 borrow in the current economic climate NI SMEs Q4Source: bdrc continental, March 2012
  • 11. The Property Markets
  • 12. Very Challenging Climate for all Property segments Prime yields in all sectors of the local market are now at their highest level in more than a decade but investment volumes remain very muted NI “Retail” segment hit hard by consumer spending retrenchment Source: Lisney
  • 13. Residential Development Land still largely in a state of paralysis – A“Psychology of deflation” still prevails Valuation estimates heavily depressed, particularly In rural west of the Bann Source: LisneyVery limited Open-Market sales volumes, Demand constrained by confidence issues and anticipatedweak recovery in housing market.Key decisions for banks, NAMA and appointed Administrators around disposals and warehousing
  • 14. Residential market still difficult in 2012 - price correction seems well advanced but not yet completePace of annual price decline has slowed, “pockets” of market have stabilised/tentative recovery butoverall risks for average prices are still to the downside - further “stock clearing” and difficult macroenvironment and mortgage market backdrop. Forecasted repossession rates for 2012 still reflectinghangover/legacy issues from regional house price boom of 2006-07. Forecasted Regional repossession rates 2012 : CML Transactions LHS Average Price RHS £3000 275000 South West 250000 South East2500 225000 North West 200000 East Mid2000 Better than UK average regions 175000 East 150000 UK1500 Worse than UK average 125000 Yorks & Hum regions 100000 Wales1000 75000 North East West Mid 500 50000 CML projecting that the rate of repossession in NI Scotland will be 3x UK average in 2012 25000 London 0 0 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 q3 q4 q1 NI 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 1.1 1.2 Source: QHPI
  • 15. Household / Consumer sector
  • 16. Continuing Headwinds on Household Finances / Consumerspending Household Challenges in 2012 New car registrations in 2011 % • A starting position of elevated levels of debt, particularly new mortgage borrowers from the 2 2005-07 period. • Falling real living standards – inflation outpaced 0 incomes in 2010, 2011 & 2012? -2 NI • Negative “wealth effect” from steep decline in asset values Wales -4 Scotland • Pensions reform – Private (and Public) sectors • Personal taxation and National Insurance -6 UK increases – middle and upper income groups England squeezed -8 • UK-wide Welfare and Benefit reforms – recurring ROI impact-10 … but inflation has moderated and further falls should be supportive of a gradual recovery in real-12 HH income/expenditure
  • 17. Source: DETI, Ipsos Mori Claimant increase largely from lower wage occupations On the claimant count, NI (6.8%) compares unfavourably Increase in claimants largely from lower wage occupations with UK average (4.9%). LFS measure contradictory – 6.7% v 8.2% -65 -60 -55 -50 -45 -40 -35 -30 -25 -20 -15 -10 -5 0 5 10 15 20 25 30 35 40 Region’s labour market still softening … 1999 Q 1 tr 1999 Q 2 tr 1999 Q 3 tr 1999 Q 4 tr 2000 Q 1 tr 2000 Q 2 tr 2000 Q 3 tr 2000 Q 4 tr 2001 Q 1 tr 2001 Q 2 tr 2001 Q 3 tr 2001 Q 4 tr 2002 Q 1 tr 2002 Q 2 tr 2002 Q 3 tr 2002 Q 4 tr 2003 Q 1 tr 2003 Q 2 tr 2003 Q 3 tr 2003 Q 4 tr 2004 Q 1 tr 2004 Q 2 tr 2004 Q 3 tr 2004 Q 4 tr 2005 Q 1 tr 2005 Q 2 tr 2005 Q 3 tr 2005 Q 4 tr 2006 Q 1 tr 2006 Q 2 tr 2006 Q 3 tr 2006 Q 4 tr 2007 Q 1 tr 2007 Q 2 tr 2007 Q 3 tr 2007 Q 4 tr 2008 Q 1 tr 2008 Q 2 tr 2008 Q 3 tr 2008 Q 4 tr 2009 Q 1 tr 2009 Q 2 tr Net general economic condition 2009 Q 3 tr 2009 Q 4 tr 2010 Q 1 tr Net personal financial circumstances 2010 Q 2 tr 2010 Q 3 tr 2010 Q 4 tr 2011 Q 1 tr 2011 Q 2 tr 2011 Q 3 tr 2011 Q 4 tr 2012 Q 1 tr Household Confidence levels bumping along the bottom, The claimant count has now risen to 62.5k(+700 last month)
  • 18. Public sector job insecurity at elevated levels, but exaggerated onevidence to date, with the projected “shake-out” not materialisingand reductions much lower than rest of UK.How concerned, if at all, would you say you are about the possibility of Change in public sector employment by region in year to Q2being made redundant or becoming unemployed over the next few 2011 (%)months? 25 All full time workers Public sector Private sector 22 21 20 20 18 18 15 Source: Ipsos Mori 10 8 5 pwc Spending Review: One Year On 0 2009 Qtr1 2009 Qtr2 2009 Qtr3 2009 Qtr4 2010 Qtr1 2010 Qtr2 2010 Qtr3 2010 Qtr 4 2011 Qtr 1 The lowest % of losses (1.8%) in the UK despite the highest % of employees. However, the opportunity cost of any job protectionism is the impact on capital budgets & private sector, where the positive multipliers are likely to be greater.
  • 19. The “Working Poor” – HMRC income tax distribution data providessome indication of the likely disproportionate “squeeze” on theregion’s households from higher food, petrol and energy costs –counterbalanced by lower regional taxation v UK ? Income Tax payers in NI, 2009-10 Relative Income Tax payers £70,000 £100,000 £150,000 £200,000 1% 0% £50,000 1% £200,000 A smaller £150,000 A larger 0% 3% £6,475 share than £100,000 share 14% £30,000 the UK £70,000 than the 14% £50,000 UK £30,000 £10,000 £20,000 24% £15,000 £10,000 £6,475 £20,000 23% -4.0% -3.0% -2.0% -1.0% 0.0% 1.0% 2.0% 3.0% 4.0% £15,000 20% Percentage point difference between NI and UK (2009/10)
  • 20. Banking & Credit Markets
  • 21. The Regional Banking Landscape – credit vigilance, balance sheet repair, re-sizing operations Company Insolvencies Individual Insolvencies 120 850 40000 750 35000 100 Creditors Vol 650 30000 80 Compulsory 550 25000 60 450 20000 350 15000 40 250 NI 10000 20 150 E&W 5000 50 0 0 2002 q4 q3 q2 2005 q4 q3 q2 2008 q4 q3 q2 2011q1 q4 00 1 2 3 04 05 06 07 08 9 0 1 0 0 0 0 1 1 20 20 20 20 20 20 20 20 20 20 20 20 q1 q1 q1 …. & restoring growth in core lending Mortgage Market stresses NI banks lending to the Agriculture sector 1200 Mortagage Arrears, £m 950 Writs&Summonses 1000 Possession Orders 900 850 800 800 750 600 700 400 650 600 200 550 500 Sep04 Dec04 Mar05 Jun05 Sep05 Dec05 Mar06 Jun06 Sep06 Dec06 Mar07 Jun07 Sep07 Dec07 Mar08 Jun08 Sep08 Dec08 Mar09 Jun09 Sep09 Dec09 Mar10 Jun10 Sep10 Dec10 Mar11 Jun11 Sep11 Dec11 Mar12 0 2007 q3 q4 2008 q2 q3 q4 2009 q2 q3 q4 2010 q2 q3 q4 2011 q2 q3 q4 q2 q1 q1 q1 q1Sources: Insolvency Service, NI Courts, BBA
  • 22. Appetite for Credit - 7 out of 10 SMEs in Northern Ireland have nowish, or need to apply for borrowing (similar to UK)“would-be seekers” borrowing event “would-be seekers” borrowing event “happy non-seekers” “happy non-seekers”Source: bdrc continental, March 2012
  • 23. Success rate of Credit Applications? c70% according to businesses 70% of overdraft applicants 72% of loan applicants now now have a facility have a facility Offered what wanted and took it Offered what wanted and took it Have overdraft after issues Have loan after issues Took other funding instead Took other funding instead No overdraft No loanSource: bdrc continental, March 2012
  • 24. £0 £100 £200 £300 £400 £500 £700 £800 £900 £1,100 £1,200 04/1-04/4 04/2-05/1 £268 £600 £553 £1,000 £955 04/3-05/2 04/4-05/3 05/1-05/4 05/2-06/1 05/3-06/2 05/4-06/3 06/1-06/4 All credit card holdersSource: Ipsos MORI 06/2-07/1 06/3-07/2 06/4-07/3 07/1-07/4 07/2-08/1 07/3-08/2 07/4-08/3 08/1-08/4 08/2-09/1 Always pay back in full 08/3-09/2 08/4-09/3 09/1-09/4 most recent statement) 09/2-10/1 09/3-10/2 09/4-10/3 10/1-10/4 10/2-11/1 10/3-11/2 10/4-11/3 Amount owed on credit card (on 11/1-11/4 11/2-12/1 Do not always pay back in full £295 £590 £995 £3,000 £3,500 £4,000 £4,500 £5,000 £5,500 £6,000 £6,500 £7,000 £7,500 02/1-02/4 02/2-03/1 02/3-03/2 £4,467 02/4-03/3 03/1-03/4 03/2-04/1 03/3-04/2 03/4-04/3 £3,830 04/1-04/4 04/2-05/1 04/3-05/2 04/4-05/3 Personal loans 05/1-05/4 05/2-06/1 05/3-06/2 05/4-06/3 06/1-06/4 06/2-07/1 06/3-07/2 06/4-07/3 07/1-07/4 07/2-08/1 07/3-08/2 07/4-08/3 08/1-08/4 08/2-09/1 08/3-09/2 08/4-09/3 09/1-09/4 borrowing” by a segment of households in the last 12 months 09/2-10/1 09/3-10/2 09/4-10/3 10/1-10/4 10/2-11/1 Personal loans taken out in the last year 10/3-11/2 Unsecured Credit – while penetration of cards and loans has fallen 10/4-11/3 Average personal loan amount 11/1-11/4 11/2-12/1 £3,991 £6,268 from peak levels of 2008 & 2009, there is greater evidence of “distress
  • 25. 15% 20% 25% 30% 35% 40% 45% 50% 55% 60% 00/1-00/4 00/2-01/1 00/3-01/2 00/4-01/3 01/1-01/4 01/2-02/1 01/3-02/2 01/4-02/3 16-24 02/1-02/4 02/2-03/1 02/3-03/2 02/4-03/3 03/1-03/4 03/2-04/1 03/3-04/2 03/4-04/3 25-34 04/1-04/4Source: Ipsos MORI 04/2-05/1 04/3-05/2 04/4-05/3 05/1-05/4 05/2-06/1 developments?) 05/3-06/2 35-44 05/4-06/3 06/1-06/4 06/2-07/1 06/3-07/2 06/4-07/3 07/1-07/4 07/2-08/1 07/3-08/2 45-54 07/4-08/3 08/1-08/4 08/2-09/1 08/3-09/2 08/4-09/3 09/1-09/4 09/2-10/1 09/3-10/2 55-64 09/4-10/3 10/1-10/4 10/2-11/1 10/3-11/2 finance and mortgage market 10/4-11/3 11/1-11/4 in the <35 age cohort (student 65+ 11/2-12/1 32% 27% 21% 29% 31% Savings account penetration by age Savings – Some rediscovering the 32% virtues of thrift – the long decline in savings penetration being “arrested” £0 £5,000 £10,000 £15,000 £20,000 £25,000 £30,000 £0 £1,000 £2,000 £3,000 £4,000 £5,000 £6,000 £7,000 £8,000 £9,000 £10,000 £11,000 £12,000 £13,000 £14,000 £15,000 00/1-00/4 00/1-00/4 00/2-01/1 00/2-01/1 00/3-01/2 00/3-01/2 00/4-01/3 00/4-01/3 £5,974 £6,237 £6,851 £5,200 £1,037 01/1-01/4 £13,323 01/1-01/4 01/2-02/1 01/2-02/1 01/3-02/2 01/3-02/2 01/4-02/3 01/4-02/3 02/1-02/4 02/1-02/4 02/2-03/1 02/2-03/1 02/3-03/2 02/3-03/2 02/4-03/3 02/4-03/3 03/1-03/4 Under £20,000 03/1-03/4 03/2-04/1 03/2-04/1 03/3-04/2 03/3-04/2 03/4-04/3 03/4-04/3 04/1-04/4 04/1-04/4 04/2-05/1 04/2-05/1 04/3-05/2 04/3-05/2 04/4-05/3 04/4-05/3 05/1-05/4 05/1-05/4 05/2-06/1 05/2-06/1 05/3-06/2 05/3-06/2 05/4-06/3 05/4-06/3 Total value of savings 06/1-06/4 06/1-06/4 06/2-07/1 06/2-07/1 06/3-07/2 06/3-07/2 06/4-07/3 £20,000 - £39,999 06/4-07/3 07/1-07/4 07/1-07/4 07/2-08/1 07/2-08/1 07/3-08/2 household income 07/3-08/2 07/4-08/3 07/4-08/3 08/1-08/4 08/1-08/4 08/2-09/1 Value of savings in main savings account 08/2-09/1 08/3-09/2 Value of savings in other savings accounts 08/3-09/2 08/4-09/3 08/4-09/3 09/1-09/4 Average savings amount 09/1-09/4 09/2-10/1 09/2-10/1 09/3-10/2 09/3-10/2 09/4-10/3 Total value of savings by 09/4-10/3 10/1-10/4 10/1-10/4 10/2-11/1 £40,000 or more 10/2-11/1 10/3-11/2 10/3-11/2 10/4-11/3 10/4-11/3 11/1-11/4 11/1-11/4 11/2-12/1 £5,081 11/2-12/1 £15,653 £26,504 £3,364 £12,298 £8,934
  • 26. Short & Medium Term Outlook
  • 27. Base Case Planning Assumption - short &medium term UK & NI regional economicgrowth on a significantly lower trajectorycompared to pre-crisis. Regional-specific andstructural factors likely to ensure NI GDP rates“lag” UK (and ROI) in recovery phase GDP forecasts % change 2012 2013 2014 2015 2016 NI 0.0 0.5 1.0 1.25 1.5% annual change “The Great Expansion” UK 0.5 1.7 2.3 2.5 2.5 6 “The Great Reassession” ROI 0.5 1.4 2.9 3.0 3.0 4 2 0 UK Northern Ireland Key Risks -2 potential for • pace of UK & ROI recoveries? -4“The Great Recession” downwards revision • diminishing financial assistance -6 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 without offset policy levers Sources : ONS, OBR UK Budget Forecasts 2011, BOI analysis
  • 28. Monetary “dynamics” just beginning to change for the regionUK “policy” interest rates projected to be lower for longer but “market” rates showingsigns of “de-coupling” / tighteningMonthly QGBPEUR= 31/08/2004 - 30/04/2012 (UTC) Line, QGBPEUR=, Bid(Last) Price 31/05/2012, 1.2470 EUR 1.44 1.4 1.36 1.32 1.28 …. while Sterling/€uro appears to made 1.24 1.2 a break to the upside 1.16 1.12 winners and losers … 1.08 .1234 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q22004 2005 2006 2007 2008 2009 2010 2011
  • 29. Critical Conditions for restoring buoyancy and growth to theregional economy Stabilising the Banking system Potential Growth Sectors Credible delivery of long-term UK deficit- reduction Agri - food Structural economic reform Technology Pharma & Health sciences “Green” – A widening & diversified export base renewables, Niche/high value manufacturing Tourism Creative Industries Regulatory / Compliance A revival in private investment and public Private Health / Private Education infrastructure Traditional - housebuilding Stabilising the housing & property markets
  • 30. Concluding Remarks
  • 31. The Real Rebalancing challenge – from Consumption to Production(Business Investment & Net Trade) Composition of GDP in Germ any, France, US, UK, 2009 % (compared with estimated GVA profile of NI region) NI UK Net Trade HH Consumption Govt Consumption Investment US France Germany -35 -20 -5 10 25 40 55 70 85 100 115 Source: CBI "A vision for rebalancing the economy", BOI Analysis The UK economy (especially regions such as Northern Ireland) are dominated by Household and Government Consumption and economic growth has become less balanced and weaker since the 1970’s. For UK (and NI), echoes of the mid-1970’s “Too Few Producers” thesis. A Time to re-visit ?
  • 32. While the short-term outlook remains very challenging, there is some basis for encouragement to support a gradual return to growth … Despite the budget squeeze, present and future, public expenditure per head is still over 20% above the UK average (still over 200,000 public sector jobs in 2014-15?) Overall levels of debt are falling to more sustainable levels & the “impairment cycle” for the financial sector is progressing (but not complete) Improved affordability for residential and commercial property – now more aligned to regional economic and financial fundamentals “Subsets” of the private sector continue to outperform (Tourism Revenues 2012&13) Low regional tax burden for households that sustains a level of spending (but with an associated opportunity cost!) Still almost 700,000 employee jobs (c 600,000 mid-90’s) Edging closer to D-Day for corporation tax decision
  • 33. Thank You Alan Bridle UK Economist / Market Analyst Bank of Ireland UK alan.bridle@boini.com 028 90433519 07736362138This document is for information purposes only. Bank of Ireland UK is not soliciting anyaction based upon it and professional advice should be obtained before acting on anyinformation contained herein.This document is based upon information as at Wednesday 16th May 2012 that weconsider reliable but we do not represent that it is complete and it should not be reliedupon as such.The Material in this document should not be reproduced in any form without theexpress permission of Bank of Ireland UK