In the slow lane of recovery

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Presentation by Alan Bridle, head of economics, Bank of Ireland. Belfast, Northern Ireland. May 2010.

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In the slow lane of recovery

  1. 1. In the slow lane of recovery CBI Economic Luncheon 18th May 2010 Alan Bridle Head of Economics 1
  2. 2. Agenda  Context – The regional challenge  Lagging not Leading  Devolution and “climate change”  Prospects & concluding thoughts 2
  3. 3. The Regional Challenge Challenge- An already stretched regional Challenge - The new Fiscal Dispensation post election balance sheet in an era of de-leveraging one scenario UK Plans Potential Regional Impact Average Annual % real increase 70 Average Annual % Real increase -0.1 60 2 0.7 10 50 0 8.4 Financial -2 Total Spending Investment Spending Current Spending 8 40 “Donor- Dependency” Group Subvention £bn -4 6 30 -6 -8 4 20 Fiscal % -10 1.7 1.9 Deficit -12 2 10 -14 0 0 Total Public Spending Regional Tax Revenues Lending Deposits -16 Debt Interest Social Other AME DEL -18 -2 -17.3 Security & Tax -20 -2.3 -4 Credits Public Sector Financial Sector Claimant unemployment returns to 10 year peaks Annual data until 2007, then monthly April 2010 3 198 200
  4. 4. Deep & Wide – the contraction in the region’s private sector Northern Ireland's Private Sector recession (change in output levels from respective "peaks" in 2007 & 2008 to Q4 2009) Retail 10.00% Food & construction services drink & wholesale 0.00% -10.00% Q2 2008 Q2 2007 Q2 2007 Q1 2007 Q2 2008 -20.00% Q2 2007 -30.00% Q1 Q2 2008 2007 -40.00% Q2 2007 -50.00% manufacturing engineering housing business & agri / utilities / financial other Sources :DETI, NI Construction Bulletin, BOI estimates 4
  5. 5. Manufacturing – later peak, earlier trough, steeper decline Overall performance of region's manufacturing,services and construction sectors, 2005-2009 115 110 Manufacturing Services Construction 105 100 95 2005 = 100 90 2005q1 2006q1 2007q1 2008q1 2009q1 Source : NI Index of Services (Experimental), NI Index of Production, NI Construction Bulletin 5
  6. 6. Lagging not Leading 7
  7. 7. Regional labour market woes NI has larger share of local authorities Employee job changes Dec08-Dec09 experiencing rate increases of 3% or more 000’s % London -63 -1.6 North-West -47 -1.6 South-East -71 -1.9 South-West -46 -2.1 Scotland -49 -2.1 East Midlands -43 -2.3 North-East -23 -2.3 Wales -28 -2.4 Yorks & Humb -59 -2.7 West Midlands -67 -2.9 East -70 -2.9 Northern Ireland -21 -2.9 UK -588 -2.2 Increase in the UE rate %, March 08 – Nov 09 8 Source: NOMIS, DETI, ONS
  8. 8. Fear of redundancy in NI little changed in last 12 months but still more prevalent in the private sector 2009 2010 Very concerned Not at all 7% Fairly concerned Concerned 11% 54% 26% Not very concerned Source: Ipsos MORI 9
  9. 9. Business Insolvency – Northern Ireland following a more typical “recession pattern” 2005 2006 2007 2008 2009 2010f 138 128 164 209 247 375-400 Company Insolv encies in Northern Ireland 120 100 Compulsory Creditors Vol 80 60 40 20 0 2002 q1 2003 q1 2004 q1 2005 q1 2006 q1 2007 q1 2008 q1 2009 q1 2010 q1 Company Insolv encies - England & W ales 6000 5000 Compulsory Creditors Vol 4000 3000 2000 1000 0 2002 q1 2003 q1 2004 q1 2005 q1 2006 q1 2007 q1 2008 q1 2009 q1 2010 q1 10 Source : Insolvency Service,
  10. 10. The residential market remains challenging Number of NI Transactions vs NI House Prices Q4 2002- Q4 2009 3000 275000 2500 250000 225000 No of Transactions House Price (£) 2000 200000 1500 175000 150000 1000 125000 500 100000 0 75000 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 2002 2003 2004 2005 2006 2007 2008 2009 No of Transactions House Prices 300000 250000 Average prices have stabilised on low turnover 200000 but we may not yet have seen the trough WORST 150000 BASE OPTIMISTIC 100000 50000 0 Q 08 Q 09 Q 11 Q 13 5 Q 97 Q 97 Q 98 Q 98 Q 99 Q 99 Q 00 Q 00 Q 01 Q 01 Q 02 Q 02 Q 03 Q 03 Q 04 Q 04 Q 05 Q 05 Q 06 Q 06 Q 07 Q 07 Q 8 0 1 nd 2 0 nd 20 0 nd 20 20 19 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 nd 2 E 3 E 4 E 4 E 4 4 1 3 1 3 1 3 1 3 1 3 1 3 1 3 1 3 1 3 1 3 1 3 1 Q Source: BOI analysis of QHPI 11
  11. 11. Why is the region lagging ?  Proximity to / Fallout from Irish economy  Property “bubble” more pronounced  Sub-scale (and unbalanced) private sector with limited export base  Sense of foreboding about looming public sector “squeeze”  Over-reliance on credit-fuelled growth ? 12
  12. 12. Dependency of the Business sector in Northern Ireland on Bank finance Sources of finance to start/ sustain/ grow business? 42 Own Savings/ Equity 33 21 Credit Cards/ Personal Loans 17 6 Grants/ Govt 11 NI UK 14 Supplier Credit 18 30 Term Loan 34 49 Overdraft 58 0 10 20 30 40 50 60 70 Average value of SME borrowing (£) 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 N.Ireland UK 13 Source: Forum of Private Business, FSB ICM survey
  13. 13. Negative Equity – a drag on growth ? Source: Fitch Ratings 2009 14
  14. 14. Some evidence of a rebound in Confidence New NI Government Net personal financial circumstances formed (2 Dec 1999) 40 Net general economic condition NI Elections & Devolution of 30 Power (March 2007) 20 10 Restored Power (30 May) 0 NI Government UK exits Suspended (Feb 2000) September 11th NI Assembly Gulf War II Housing market recession -10 Suspended slowdown Global credit crisis Increased prices for -20 food, fuel etc. -30 -40 -50 -60 Source: Ipsos Mori 15
  15. 15. … and the car market shows signs of a mini-revival Trends in new and used car registrations in NI 100.00 Y/Y % 80.00 60.00 40.00 20.00 new cars 0.00 used cars -20.00 -40.00 -60.00 2004 q3 2005 q3 2006 q3 2007 q3 2008 q3 2009 q3 q1 q1 q1 q1 q1 q1 Regional new car registrations for April 2010 (% change y/y) % change ytd, April 10 30 25 25 20 20 15 15 10 10 5 5 0 0 England Scotland N.Ireland Wales England Scotland N.Ireland Wales Source: DRDNI / SMMT 16
  16. 16. Devolution and “climate change” 17
  17. 17. Devolved Administrations reaped the benefits of economic growth and none embarked on a significant reduction in the size of the public sector ! Rise in public spending share of GDP from 1998/99 to 2011/12 The growth in the Northern Ireland DEL (current & capital expenditure, actual and planned) £ In cash terms, + £1.8bn since 12,000million 06/07 or CAGR of c 5% 10,000 8,000 6,000 4,000 2,000 0 2006/07 2010/11 Source: CEBR, NI Draft Budget 2008-2011, Review of 2010-11 Spending Plans 18
  18. 18. We are more (not less) dependent on Public Expenditure (even pre-recession) Public Spending as a share of GDP 19 Source: CEBR “The State of the Nation”, April 2010
  19. 19. Devolution and “climate change” In fair weather …  Focus on reallocation of resources at the margin between spending programmes  Limited powers to mitigate a “demand shock” (“supply-side” performance longer to evaluate)  Little critical assessment of the effectiveness of the interventions / policy responses so far  Public spending – NI has some history in “underspend” … accumulated EYF … over-commitment in annual budgets Now …  The politics of withdrawing programme support  The “disconnect” between consumption and cost of public service provision  Continue Barnett “consequentials” or new mechanism ?  “Barnett squeeze” in reverse ?  The local gap – optimal balance - spending cuts v tax rises?  Critical decisions – the funding of water & health and social care  In “administration” or in “government” ? 20
  20. 20. Still the “poor relation” in the UK? Source: ONS 21
  21. 21. Forecasts & Planning assumptions 2009 2010 2011 NI Modest growth to resume but NI to GVA Growth % -4.5 0.5 0.5 – 1.0 underperform UK & ROI yoy Claimant 53k 60k 60-62k Unemployment 4 3 Average House 161k 150k 145-150k 2 Prices 1 Financial Variables (y/e) 0 -1 -2 Latest End End Dec -3 w/c 10 Sept 10 10 -4 UK ROI NI May -5 -6 UK Base Rate 0.5 0.5 0.5 -7 UK- GDP Euro Repo 1.0 1.0 1.0 -8 -9 ROI – GNP US Fed Funds 0-0.25 0-0.25 0.75 -10 NI - GVA -11 Euro/ GBP 86p 83p 80p -12 GBP/ USD 1.50 1.57 1.62 2009 2010 2011 Source: BOI Group 22
  22. 22. Opportunities & “Other” Risks Opportunities  Re-shape the public sector and begin long-term rebalancing  Greater private sector participation in public service provision  Recovery in world markets, a competitive exchange rate, a narrow export base, shift resources into the tradable sector.  A gradual acceleration in housebuilding  Entrepreneurship – recession, potential public sector squeeze reduces the “cost of failure” ? “Other Risks”  Inevitable “normalisation” of interest rates  Sharp revaluation of Sterling  Recovery in UK & Irish economies is slower than forecast  Significant unrest / industrial action in the NI public sector  Decreasing regional aid ceilings from Jan 2011 23
  23. 23. Summary UK & Ireland • 2007-2010 has exposed an overdependence on credit-financed growth - outlook will be shaped by the speed and scale of the necessary deleveraging process (financial sector, firms, households & government) • While Ireland is already experiencing a fairly concentrated adjustment in public finances, it is only commencing in the UK (NI) and the adjustment is likely to be more extended. (“Two Parliaments of Pain”, IFS) Northern Ireland • Private sector recession ends…public sector recession starts? • 2010 -11 in “Twilight” - return to very modest growth • credit growth may lag economic growth • high risk of a “jobless recovery” • Growth “drivers” need to change – exports & investment For Businesses • Cash & Costs and the Debt / Equity mix • Winners – strong balance sheets & turnover outside NI • Domestic market-only – growth at the expense of others • Aligning your product / service to a customer with (generally) less money to spend A SLOW & GRADUAL RECOVERY IS MORE PREFERABLE TO A RAPID BOUNCE 24
  24. 24. Timeframes ! The experience of the Deleveraging / Austerity scenario 1Deleveraging driven by off-trend growth is not linked to a recession Source: International Monetary Fund: McKinsey Global Institute analysis 25
  25. 25. Thank You alan.bridle@boini.com This document is for information purposes only. Bank of Ireland Group is not soliciting any action based upon it and professional advice should be obtained before acting on any information contained herein. This document is based upon information as at 14th May 2010 that we consider reliable but we do not represent that it is complete and it should not be relied upon as such. The Material in this document should not be reproduced in any form without the express permission of Bank of Ireland 26

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