In the slow lane of recovery

1

In the slow lane of recoveryCBI Economic Luncheon

18th May 2010

Alan Bridle

Head of Economics

2

Agenda

Context – The regional challenge

Lagging not Leading

Devolution and “climate change”

Prospects & concluding thoughts

3

Average Annual % real increase

-17.3

0.7-0.1

-20

-18

-16

-14

-12

-10

-8

-6

-4

-2

0

2

Total Spending Investment Spending Current Spending

Average Annual % Real increase

8.4

1.7 1.9

-2.3-4

-2

0

2

4

6

8

10

Debt Interest Social

Security & Tax

Credits

Other AME DEL

%

UK PlansPotential Regional Impact

Challenge - The new Fiscal Dispensation post election

one scenario

0

10

20

30

40

50

60

70

Total Public Spending Regional Tax Revenues Lending Deposits

£b

n

Challenge- An already stretched regional

balance sheet in an era of de-leveraging

Public Sector Financial Sector

“Donor- Dependency”

Fiscal

Deficit

Financial

Group

Subvention

Claimant unemployment returns to 10 year peaks

The Regional Challenge

1984

2007

April2010

Annual data until 2007, then monthly

4

Deep & Wide – the contraction in the region’s private sector

-50.00%

-40.00%

-30.00%

-20.00%

-10.00%

0.00%

10.00%

manufacturing engineering housing business &

financial

agri / utilities /

other

Northern Ireland's Private Sector recession (change in output

levels from respective "peaks" in 2007 & 2008 to Q4 2009)

construction servicesRetail

& wholesale

Sources :DETI, NI Construction Bulletin, BOI estimates

Q2 2008

Q2 2008

Q2 2007Q12007

Q2 2007

Q2 2007

Q1 2007

Q2 2007Q2 2008

Food &drink

5

Manufacturing – later peak, earlier trough, steeper decline

2005q1

2006q1

2007q1

2008q1

2009q1

90

95

100

105

110

115

Overall performance of region's manufacturing,services and construction

sectors, 2005-2009

ManufacturingServicesConstruction

Source : NI Index of Services (Experimental), NI Index of Production, NI Construction Bulletin

2005 = 100

7

Lagging not Leading

8

Regional labour market woes

Increase in the UE rate %, March 08 – Nov09

NI has larger share of local authorities

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

Employee job changes Dec08-Dec09

Source: NOMIS, DETI, ONS

9

Fear of redundancy in NI little changed in last 12 months

but still more prevalent in the private sector

26%54%

11%

7%

2009 2010

Source: Ipsos MORI

Very concerned

Not at all

concerned

Not very

concerned

Fairly

Concerned

10

Business Insolvency – Northern Ireland following a more

typical “recession pattern”

0

20

40

60

80

100

120

2002 q1 2003 q1 2004 q1 2005 q1 2006 q1 2007 q1 2008 q1 2009 q1 2010 q1

Company Insolvencies in Northern Ireland

Compulsory Creditors Vol

0

1000

2000

3000

4000

5000

6000

2002 q1 2003 q1 2004 q1 2005 q1 2006 q1 2007 q1 2008 q1 2009 q1 2010 q1

Company Insolvencies - England & Wales

Compulsory Creditors Vol

Source : Insolvency Service,DETINI

2005 2006 2007 2008 2009 2010f

138 128 164 209 247 375-400

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The residential market remains challenging

0

500

1000

1500

2000

2500

3000

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

Tra

nsa

ctio

ns

75000

100000

125000

150000

175000

200000

225000

250000

275000

Ho

use

Pri

ce (

£)

No of Transactions House Prices

Number of NI Transactions vs NI House PricesQ4 2002- Q4 2009

0

50000

100000

150000

200000

250000

300000

Q1 1997

Q3 1997

Q1 1998

Q3 1998

Q1 1999

Q3 1999

Q1 2000

Q3 2000

Q1 2001

Q3 2001

Q1 2002

Q3 2002

Q1 2003

Q3 2003

Q1 2004

Q3 2004

Q1 2005

Q3 2005

Q1 2006

Q3 2006

Q1 2007

Q3 2007

Q1 2008

Q32008

End Q4 2009

End Q4 2011

End Q4 2013

End Q4 2015

WORST

BASE

OPTIMISTIC

Average prices have stabilised on low turnover

but we may not yet have seen the trough

Source: BOI analysis of QHPI

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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 ?

13

Dependency of the Business sector in Northern Ireland on Bank finance

Sources of finance to start/ sustain/ grow business?

58

34

18

11

17

33

49

30

14

6

21

42

0 10 20 30 40 50 60 70

Overdraft

Term Loan

Supplier Credit

Grants/ Govt

Credit Cards/ Personal Loans

Own Savings/ Equity

NI UK

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

N.Ireland UK

Average value of SME borrowing (£)

Source: Forum of Private Business, FSB ICM survey

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Negative Equity – a drag on growth ?

Source: Fitch Ratings 2009

15

Some evidence of a rebound in Confidence

-60

-50

-40

-30

-20

-10

0

10

20

30

40

Net personal financial circumstances

Net general economic condition

Source: Ipsos Mori

September 11th

New NI Government

formed (2 Dec 1999)

NI Government

Suspended (Feb 2000)

Restored Power

(30 May)

NI Assembly

Suspended

Gulf War II Housing market

slowdown

Global credit crisis

Increased prices for

food, fuel etc.

NI Elections & Devolution of

Power

(March 2007)

UK exits

recession

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… and the car market shows signs of a mini-revival

-60.00

-40.00

-20.00

0.00

20.00

40.00

60.00

80.00

100.00

2004

q1

q3 2005

q1

q3 2006

q1

q3 2007

q1

q3 2008

q1

q3 2009

q1

q3

Trends in new and used car registrations in NI

new cars

used cars

Y/Y %

0

5

10

15

20

25

30

England Scotland N.Ireland Wales

Regional new car registrations for April 2010 (% change y/y)

Source: DRDNI / SMMT

0

5

10

15

20

25

England Scotland N.Ireland Wales

% change ytd, April 10

17

Devolution and “climate change”

18

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

Source: CEBR, NI Draft Budget 2008-2011, Review of 2010-11 Spending Plans

0

2,000

4,000

6,000

8,000

10,000

12,000

2006/07 2010/11

The growth in the Northern Ireland DEL (current & capital expenditure, actual

and planned)

£

million

In cash terms, + £1.8bn since

06/07 or CAGR of c 5%

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We are more (not less) dependent on Public Expenditure

(even pre-recession)

Source: CEBR “The State of the Nation”, April 2010

Public Spending as a share of GDP

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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” ?

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Still the “poor relation” in the UK?

Source: ONS

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Forecasts & Planning assumptions

2009 2010 2011

NI

GVA Growth %

yoy

-4.5 0.5 0.5 – 1.0

Claimant

Unemployment

53k 60k 60-62k

Average House

Prices

161k 150k 145-150k

Financial Variables (y/e)

Latest

w/c 10

May

End

Sept 10

End Dec

10

UK Base Rate 0.5 0.5 0.5

Euro Repo 1.0 1.0 1.0

US Fed Funds 0-0.25 0-0.25 0.75

Euro/ GBP 86p 83p 80p

GBP/ USD 1.50 1.57 1.62-12

-11

-10

-9

-8

-7

-6

-5

-4

-3

-2

-1

0

1

2

3

4

UK ROI NI

2009 2010 2011

Modest growth to resume but NI to

underperform UK & ROI

UK- GDP

ROI – GNP

NI - GVA

Source: BOI Group

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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

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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

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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

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Thank You

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This document is based upon information as at 14th May 2010 that we consider reliable but we do notrepresent that it is complete and it should not be relied upon as such.

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