1. The Regional Economy in 2012
Balance Sheet Recession,
Austerity & Growth Challenge
Alan Bridle, UK Economist
CBI Economic Luncheon 18th May 2012
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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 Exposure
Sandwiched between two highly indebted economies that had oversized banking sectors
and both now set on a necessary course of “deleveraging”
4. The UK’s limited “recovery” experience to date and scale of debt-reduction plans
should govern regional growth and public spending expectations for at least two
Parliaments and inform current NI Executive policy-making
Source: 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 29
Sources: PESA, DFP, NOMIS, BOI estimates
6. Rear view mirror reveals NI’s “recession experience” has greater similarity to ROI
than 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
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 2011
Source : NI Index of Services (Experimental), NI Index of Production, NI Construction
Bulletin, bdrc continental
9. Growth Ambitions in 2012 – while near half of firms say they will stay the same
size in the next 12 months, a larger percentage of NI firms plan to
contract/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 the
short-term. NI SMEs more exercised than UK overall by other factors, including
finance 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 Q4
Source: bdrc continental, March 2012
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: Lisney
Very limited Open-Market sales volumes, Demand constrained by confidence issues and anticipated
weak 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 complete
Pace of annual price decline has slowed, “pockets” of market have stabilised/tentative recovery but
overall risks for average prices are still to the downside - further “stock clearing” and difficult macro
environment and mortgage market backdrop. Forecasted repossession rates for 2012 still reflecting
hangover/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 East
2500 225000 North West
200000 East Mid
2000 Better than UK average regions
175000 East
150000 UK
1500 Worse than UK average
125000 Yorks & Hum
regions
100000 Wales
1000
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
16. Continuing Headwinds on Household Finances / Consumer
spending
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
18. Public sector job insecurity at elevated levels, but exaggerated on
evidence to date, with the projected “shake-out” not materialising
and 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 Q2
being 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 provides
some indication of the likely disproportionate “squeeze” on the
region’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)
22. Appetite for Credit - 7 out of 10 SMEs in Northern Ireland have no
wish, 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 loan
Source: 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 holders
Source: 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
04/1-04/4
Source: 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
27. Base Case Planning Assumption - short &
medium term UK & NI regional economic
growth on a significantly lower trajectory
compared to pre-crisis. Regional-specific and
structural 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 region
UK “policy” interest rates projected to be lower for longer but “market” rates showing
signs of “de-coupling” / tightening
Monthly 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 Q2
2004 2005 2006 2007 2008 2009 2010 2011
29. Critical Conditions for restoring buoyancy and growth to the
regional 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
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
07736362138
This document is for information purposes only. Bank of Ireland UK 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 Wednesday 16th May 2012 that we
consider reliable but we do not represent that it is complete and it should not be relied
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