“Green Shoots and False Dawns”

Alan Bridle Head of Economics & Research

CBI Economic Luncheon 20th May 2009

The Recession

“made in Northern Ireland”

3

Where did the growth come from?

(Contribution to GVA by industry groups)

3

20.8

5.6

27.9

4.1

7.1

15

16.6

2.4

17.6

4.9

26.4

3.9

8.5

15.6

20.8

0

5

10

15

20

25

30

Agri/ Forestry/Mining

Manufacturing/Utilities

Transport Public Sector Other Services Construction Wholesale/Retail Hotels &

Rests

Retail Estate &Financial

Intermediate

2001

2006

Source: ONS

Slower Growth Segments Faster Growth Segments

4

Contributed to our first real property cycle Transactions & House Prices

Q4 2002- Q1 2009

0

500

1000

1500

2000

2500

3000

No

of T

rans

actio

ns

50000

100000

150000

200000

250000

Hou

se P

rice

(£)

No of Transactions House PricesSource: BoI HPI

1963

£158,519

Average House Price

Average Transactions

5

NI Housing – “Supply response” to spell of overdrive and rampant land inflation

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

20000

98/99 99/00 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 (e)

New Dwellings Completed

Projected Need (HGI RDS 1998-2015, Revised 2006)

25 yr Average

Sources:NI Housing Statistics & NI Regional Development Strategy

6

Collateral damage to Business & Financial Services…..Manufacturing resilient until Q4 2008

Services, Manufacturing & Construction Output Q1 2001- Q4 2008

90

95

100

105

110

115

120

125

130

Q101

Q201

Q301

Q401

Q102

Q202

Q302

Q402

Q103

Q203

Q303

Q403

Q104

Q204

Q304

Q404

Q105

Q205

Q305

Q405

Q106

Q206

Q306

Q406

Q107

Q207

Q307

Q407

Q108

Q208

Q308

Q408

Services Manufacturing Construction

Source: DFP/ DETI

7

Not everything has moved downManufacturing & Services performance de-composed

Manufacturing Output (selected)

-6.3

8.9

-11.8

-9.8-10.5

-0.2

-15

-10

-5

0

5

10

Total Manufacturing Food, Drink &Tobacco

Engineering & AlliedIndustries

Electrical & Optical Transport Equipment Other Manufacturing

% y

oy

Services

-3.4

-7

-2.7

3.1

-4.7

-8

-6

-4

-2

0

2

4

All Services Wholesale/ Retail Hotels & Restaurants Transport, Storage &Comms

Business service &Finance

% y

oy

Source: DETI Index of Production/ Index of Services y/y q4 2008

8

Annual % Change in Employee Jobs (by selected sector) Dec 07- Dec 08

1.5

-3.5

-11.4

-1.1 -1.1

-4.5-3.5

0

-2

-14

-12

-10

-8

-6

-4

-2

0

2

4

Agriculture Manufacturing Construction Services Wholesale/Retail

Hotels/Restaurants

Real Estate/Renting/Business

Public Sector Total

%

Economically Inactive

545

550

559

573

530

535

540

545

550

555

560

565

570

575

580

Q2 08 Q3 08 Q4 08 Q1 09

'000

Source: QES, DETINI

Falling employment & rising inactivity

9

Registration of new cars in NI has fallen dramatically

Source: DRDNI/ SMMT

Annual Change in New Car Registrations Q1 07- Q4 08

780

-573

458

285

1050

206

477

302

106

-298 -314

-1342

-1150

-1698 -1735

-1601

-2682

-1320-1219

-451

-214-64-54-241

-2700

-2500

-2300

-2100

-1900

-1700

-1500

-1300

-1100

-900

-700

-500

-300

-100

100

300

500

700

900

1100

Jan-07

Feb-07

Mar-07

Apr-07

May-07

Jun-07

Jul-07

Aug-07

Sep-07

Oct-07

Nov-07

Dec-07

Jan-08

Feb-08

Mar-08

Apr-08

May-08

Jun-08

Jul-08

Aug-08

Sep-08

Oct-08

Nov-08

Dec-08

An

nu

al C

han

ge

Regional New Car Registrations figures for March 2009yoy % Change +/-

-21.84

-31.75

-22.82

-27.35

-30.58

-35

-30

-25

-20

-15

-10

-5

0

Northern Ireland England Scotland Wales UK

% C

han

ge yo

y

10

NI Corporate Insolvencies rising yoy- the non-property/real economy bad debt cycle has some way to go

0

10

20

30

40

50

60

70

Q102

Q202

Q302

Q402

Q103

Q203

Q303

Q403

Q104

Q204

Q304

Q404

Q105

Q205

Q305

Q405

Q106

Q206

Q306

Q406

Q107

Q207

Q307

Q407

Q108

Q208

Q308

Q408

Q109

2004 2005 2006 2007 2008 2009(f)

121 138 128 164 209 c300

Annual Figures

Source: The Insolvency Service

11

Recession impact on the island economy

Estimate of Cross-Border Shopping (mid-points)

275

450575

0

200

400

600

2007 2008 2009

Average Income Per Capita

27%

18%

-21%-30%

-20%

-10%

0%

10%

20%

30%

1953 1969 2005

Cross-Border Trade Gap

14341612

-1255 -1159-1500

0

1500

2007 2008

ROI E xpor ts NI E xpor ts

Container Port Traffic 2007-2008

-3.7

-7.3

-4.3

-11-15

-10

-5

0

Belfast Warrenpoint NI ROI

Source: IMDO

Source: CSO (Feb 2009)

Source: BOI Analysis

Source: CSO

Єm

Єm

NI

ROI

12

Residential property market adjustment well advanced but what will follow?

Source: QHPI & BOI

• Temporary overhang of excess supply

• Transition to affordable housing well advanced

• Average prices have further to fall – 10%? (the adjustment in “new builds” is near complete)

• Recovery signs- transactions before prices

• Peak- Trough- Peak 2007- 2017?

• Confidence?

0

50000

100000

150000

200000

250000

300000

£

FORECAST HISTORIC

13

First Time Buyers hold the keyFTB & Affordability

-

1,000

2,000

3,000

4,000

5,000

6,000

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

Q2

Q3

Q4

Q1

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

No

of

FT

B L

oan

s

0.0

5.0

10.0

15.0

20.0

25.0

Med

ian

In

tere

st

Paym

en

ts a

s a

% o

f In

co

me

Number of Loans (LHS) Median Interest Payments as a % of income (RHS)

Source: CML & BOI Analysis

Median Deposit: 13%

14

House builders- comfort for the medium term? Population & household projections

1600

1650

1700

1750

1800

1850

1900

1950

2000

2050

Po

pu

latio

n

2.10

2.15

2.20

2.25

2.30

2.35

2.40

2.45

2.50

2.55

2.60

Avg

Ho

use

ho

ld S

ize

Population 000's (LHS)

Average Household Size (RHS)

Source: NISRA

15

Confidence levels in NI stabilising?

-75

-55

-35

-15

5

25

45

Qtr

1 2

000

Qtr

2 2

000

Qtr

3 2

000

Qtr

4 2

000

Qtr

1 2

001

Qtr

2 2

001

Qtr

3 2

001

Qtr

4 2

001

Qtr

1 2

002

Qtr

2 2

002

Qtr

3 2

002

Qtr

4 2

002

Qtr

1 2

003

Qtr

2 2

003

Qtr

3 2

003

Qtr

4 2

003

Qtr

1 2

004

Qtr

2 2

004

Qtr

3 2

004

Qtr

4 2

004

Qtr

1 2

005

Qtr

2 2

005

Qtr

3 2

005

Qtr

4 2

005

Qtr

1 2

006

Qtr

2 2

006

Qtr

3 2

006

Qtr

4 2

006

Qtr

1 2

007

Qtr

2 2

007

Qtr

3 2

007

Qtr

4 2

007

Qtr

1 2

008

Qtr

2 2

008

Qtr

3 2

008

Qtr

4 2

009

Qtr

1 2

009

NI Net Personal Economic Circumstances NI Net General Economy ROI Personal Economic Circumstances ROI General Economy

September 11th

Housing market slowdown

Global credit crisis, increased prices for food. Fuel etcGulf War II

US Slowdown, falling

IT Shares

NI Assembly Suspended

NI Elections & Devolution of Power (March 07)

Source: Ipsos-MORI MFS Q4 2008

16

Redundancy fears much lower in NI than in ROI & GB

26%54%

11%

7%

Source: Ipsos-MORI MFS Q4 2008

Not at all concerned

Very concerned

Fairly concerned

Not very concerned

Fear of redundancy in NI

17

Tentative evidence of beginning of some regional household B/S adjustment

Liabilities

25 27 27 28 26

28 30 36 35 33

7 89 8 9

0

20

40

60

80

Q1 08 Q2 08 Q3 08 Q4 08 Q1 09

Consumer Credit- Secured & Unsecured

Mortgages Credit Cards Personal Loans

Assets

15 17 18 20 17

2631

37 3634

0

10

20

30

40

50

60

Q1 08 Q2 08 Q3 08 Q4 08 Q1 09

Savings & ISAs

ISAs Savings

Source: BOI Analysis of Ipsos MORI data

18

Key indicators- Planning assumptions

2008 (y/e) 2009 (y/e) 2010 (y/e)

NI

GVA Growth % yoy

0.25 -2.50 0.00

Claimant Unemployment

36k 57k 61k

Average House Prices

168k 140k 145k

Financial Variables (y/e)

UK Base Rate 2.0 0.5 1.5

Euro Repo 2.5 1.0 1.0

US Fed Funds 0-0.25 0-0.25 0.75

Euro/ GBP 94p 85p 80p

GBP/ USD 1.49 1.47 1.58

Facing New Realities

20

Challenge- An already stretched regional balance sheet in an era of de-leveraging

0

10

20

30

40

50

60

Total Public Spending Regional Tax Revenues Lending Deposits

£bn

Source: BOI Analysis

Fiscal

Deficit

Public Sector Financial Sector

Financial

Group

Subvention

“Donor- Dependency”

21

Challenge - The new Fiscal Dispensation post April 11- one scenario

Source: UK Budget 2009/ IFS Analysis

Average Annual % real increase

-17.3

0.7

-0.1

-20-18-16-14-12-10-8-6-4-202

Total Spending InvestmentSpending

Current Spending

UK Plans

Average Annual % Real increase

8.4

1.7 1.9

-2.3-4

-2

0

2

4

6

8

10

Debt Interest SocialSecurity & Tax

Credits

Other AME DEL

%

Potential Regional Impact

AME- Non-discretionary

- Demand-driven

NI “at risk”

“Discretionary”

22

The changing profile of public expenditure (outturn & plans)Current Expenditure

7546

8036

8309

8597

8972 8972

6500

7000

7500

8000

8500

9000

9500

2006/07 2007/08 2008/09 2009/10 2010/11 11/12/13/14

£m

?

Capital Expenditure

803

1015 9941058

1156

998

14091318

1393 1412

0

200

400

600

800

1000

1200

1400

1600

2006/07 2007/08 2008/09 2009/10 2010/11 11/12/13/14

£m

Capital DEL Budget Capital Investment (net of receipts)

?

Source: NI Budget 2008-11/ Public Expenditure Analyses 2008

23

Current expenditure allocations by department 09/10 & 10/11

1.7

2.8

5.8

5.3

4.5

3.2

-0.7

7.5

-1.3

0

0.4

2.9

5.3

4.4

6.2

2.6

-1.2

4.8

-0.8

8.4

-0.05

0

2.3

-9.8

-10 -8 -6 -4 -2 0 2 4 6 8 10

DARD

DCAL

DENI

DEL

DETI

DFP

DHSSPS

DOE

DRD

DSD

OFMDFM

NI Assembly

Other Depts

+/-

2009/10 2010/2011

Source: NI Budget 2008-11

24

Claimant unemployment returns to 10 year peaksStructural vs cyclical?

Claimant Unemployemnt in NI, 1984- March 2008 - quarterly from 2007

0

20000

40000

60000

80000

100000

120000

140000

1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2007Feb

2007Apr

2007Jun

2007Aug

2007Oct

2007Dec

2008Feb

2008Apr

2008Jun

2008Aug

2008Oct

2008Dec

2009Feb

2009Apr

Source: ONS

25Source: NISRA

Projected % Change in age cohorts in NI, 2006- 2031

-10.0%

10.0%

30.0%

50.0%

70.0%

90.0%

110.0%

130.0%

Under 20 20-34 35-49 50-64 65-79 80+

Our changing demographics

26

Opportunities – as the storms subside

• Sterling has lost c 25% of its value on a trade-weighted basis – UK post-ERM experience 1993 -

• More balanced growth – C+I+G+(X-M) ? • Manufacturing – a mini-revival ?• Service exports – a very low base (tourism)• Import substitution • Greater role in Public Service provision – health, education,

transport• Exploiting potential growth segments • Environment / Renewables / Online distribution / Regulatory and Legal

agenda, Healthcare • Construction – a gradual pick-up in house building from 2010/11 - key infrastructure projects• Enterprise – a higher rate of business formation?

27

Challenges • Job retention • Legacy of “credit crunch” and “asset price bubble” – capital constraints

– new financing models / funding mix?• “Scars” of recession – repairing confidence• “Long Squeeze” on UK public finances• Pains of Transition – weaning off PE / greater self-financing / capacity of tax base ?

Does NI need a new “Social Contract” or “Big Conversation” ?

For businesses …• Positioning for the upturn • Leaner & Fitter – sustaining “cost efficiencies” post-recession• Profit – from maximise to optimise?• Strategy – more tortoise and less hare?

28

Concluding Thoughts (and Questions !)• A growth challenge – short & medium term. Resumption in 2010 but of

the sober variety – risks of a “jobless recovery”• Swollen ranks of unemployed and inactive (18-30 yrs old) – training, re-

skill, up-skill – identifying future needs for global recovery• Policy priorities – tension between “jobs” and “productivity” goals?• Spending priorities – tension between “current” and “capital”?• Future engagement with our Donors (HMT,EU) – “more fish” or “ a

fishing rod” ? • Where does our comparative advantage lie – lower wage and property

costs and available labour pool?• PfG and the economy – what type? Wedded to a “social/welfare

economy” model ? “Too few producers”• L-T competitiveness and prosperity still rests on our ability to trade.

29

Manufacturing still matters!

Share of Total Exports 2007/ 09 (£5.9bn)

High Potential Services3.1%

Manufacturing "Services"0.9%

Manufacturing92.6%

Construction "Services"3.4%

Destination of Manufacturing Sales 07/08 (p)

NI25.0%

ROW15.7%

Rest of EU8.7%

ROI10.7%

GB39.9%

Source: NI Manufacturing Sales & Exports Survey 07/08

Exporting NI Services Study

“Pessimism is a luxury that (we) can never allow ourselves”

Golda Meir PM Israel 1969-74

Thank You.

Alan Bridle

E: alan.bridle@boini.comT: 028 90433519