Slide 1

Recovery, Recession or Depression

Livestock & Meat Commission Red Meat Prospects Conference, Greenmount

Richard Ramsey Chief EconomistUlster Bank, Group Communications 29th March 2012

Slide 2

DepressionDouble-DipsDeflation

Default

DerivativesDevaluationDrachma

Death SpiralDe-LeveragingDowngrades

Deficits DebtDownturn

Doom & Gloom

As long as we avoid the D-words we should be OK!

Slide 3

Global PMI picks up in February driven by strong growth in services (particularly US)

Global Output - PMI

25

30

35

40

45

50

55

60

65

Aug-07 May-08 Feb-09 Nov-09 Aug-10 May-11 Feb-12

Total Manufacturing Services

Source: Markit Economics

ExpansionC

ontraction

Slide 4

US to post the strongest rate of growth in 2012 and Greece the steepest contraction

GDP Forecasts February 2012

-8

-6

-4

-2

0

2

4

US EZ

German

y

France UK

Italy

Spain

Greece RoI

Portug

al

% Y/Y

2011 2012 2013

Source:Consensus Economics

Slide 5

Non-Inflationary Continuous Expansion

• Unbroken employment & economic growth

• Unemployment rate hit record low in 2007

• Public Expenditure, Property & Celtic Tiger Booms

• Average house price up 260% (UK=160%)

• NI’s brand image improved in the eyes of the world

Northern Ireland - The NICE Decade: 1998-2007

Slide 6

NI receives a RUDE awakening in 2008-09…

Rising Unemployment & Declining Economic Activity• Simultaneous slowdown on a range of fronts

- Property market & wider private sector

- Public expenditure growth

- Rapid deterioration in RoI & UK economies

- Collapse in global trade & external economic conditions

All occurring within a wider credit crunch

NI’s first recession since the early 1980s

Slide 7

The myth that NI is recession proof & would fare better than the UK has been dispelled….

Annual Economic Growth in Real Terms 2007-2010 Refers to Gross Value Added* & GDP for RoI

-7.5%

-3.5%-3.9%

-10.2%

-12%

-9%

-6%

-3%

0%

Lon Scot SE UK UK** EM SW NE Y&H NW Wal East WM NI RoI

Y/Y

Source:ONS, CSO & * UB Calculations Using ONS GVA Deflators, **UK less extra regio

NI,UK & RoI Economic Growth NI & UK GVA, RoI GDP

-6.0%

-3.1%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

NI RoI GDP UK

Source:ONS, CSO & * UB Calculations Using ONS GVA Deflators

Downturn by numbers… a quick recap

1. Unemployment up 38,000 by Feb 2012 & still rising

2. Personal insolvencies hit record high in 2011 & 110% higher v 2007

3. Corporate insolvencies up 116% in 2011 v 2007

4. House prices have fallen by 46%-53% from peak (by Q4 2011)

5. House completions have fallen by >55% from 2006 peak and still falling

6. Mortgages for home movers at lowest level since 1974

7. 21,785 p.a. fewer new car sales relative to 2007 (-32%)

8. UK consumer prices (CPI) up 16% since August 2007:

Slide 9

Private sector has a long way to go to return to 2007 levels

Slide 9

NI Private Sector Output LevelsComposite of construction, production and services sectors

75

80

85

90

95

100

105

110

2002 Q2 2003 Q4 2005 Q2 2006 Q4 2008 Q2 2009 Q4 2011 Q2

PSO Index

Source: Ulster Bank Private Sector Output Index (2008=100), using DFP output indices

17%fall

14% below peak and back at Q1 2004 levels

Slide 10

A meaningful recovery has not taken hold outside of manufacturing

Slide 10

NI's Private Sector Output

-45%-40%-35%-30%-25%-20%-15%-10%

-5%0%5%

10%15%

Production Construction Services Private Sector

Peak to Trough Recovery from Trough Q3 2011 relative to peak

Peak Q4 2007

Peak Q1 2007

Peak Q3 2006 Peak Q2 2007

Source: DFP & UB PSO Index

Slide 11

‘Winners’ during the downturn…

Slide 11

Industrial Group % Change

Recession Winners ↑↑↑

Other Services 22.9%

Agriculture (Gross Output, based on annual figures 2007‐2010) 20.1%

Utilities (Electricity & Gas) 12.7%

Food, Drink & Tobacco 10.4%

Utilities (Water Supply & Waste Management) 8.0%

Chemicals & Chemical Products (pharmaceuticals) 7.9%

Transport, Storage & Communications 6.1%

Change in NI Private Sector OutputQ2 2007 ‐ Q3 2011

Source: DFP Indices of Production, Services and Construction, DARD & Ulster Bank calculations

Slide 12

….outnumbered by ‘losers’ & ‘big losers’

Slide 12

Industrial Group % Change

Recession Losers    ↓↓↓

All Production Industries ‐3.4%

All Manufacturing ‐5.8%

Engineering & Allied Industries ‐6.5%

Wholesale & Retail Distribution, Accommodation & Food Service ‐6.5%All Private Sector Services ‐12.8%

Textiles & Textile Products ‐13.2%

Total Private Sector Output (Construction + Production + Private Services) ‐13.8%

Recession Big Losers    ↓↓↓

Total Other Manufacturing ‐15.1%

Basic Metals & Fabricated Metal Products ‐17.2%

Mining & Quarrying ‐29.6%

Wood & Paper Products ‐36.3%

Construction ‐37.1%

Business Services & Finance ‐37.4%Source: DFP Indices of Production, Services and Construction, DARD & Ulster Bank calculations

Slide 13

Demand remains a key problem in 2012

Private Sector Business Activity - PMIs Monthly

30

35

40

45

50

55

60

65

Feb-03 Feb-04 Feb-05 Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Feb-12

NI UK RoI

Source: Markit & Ulster Bank NI PMI: 50 = threshold between expansion / contraction

Expansion

Contraction

Slide 14

Demand deficiency a major problem for services & construction, will manufacturing experience a double-dip?

NI Private Sector Output 3 month moving average

30

35

40

45

50

55

60

65

70

Feb-04 Feb-05 Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Feb-12

Manufacturing Services Construction

Source: Markit Economics & Ulster Bank NI PMI

ExpansionC

ontraction

Slide 15

Divergence between NI & UK performance due to 2 factors

Slide 15

Tourism Trade Investment

Downturn Under Construction /

Property

Slide 16

More than half of local SME exports are RoI bound…. NI needs to Diversify

Slide 16

NI Manufacturing Exports by Destination 2010/11

51.9%

22.4%

11.4%

46.4%

62.1%

25.7%

23.7%

29.3%

19.0%

18.8% 24.4%

64.9%

0%

20%

40%

60%

80%

100%

Small Medium Large SMEs

RoI Rest of EU RoW

Source: DFP Manufacturing Sales & Exports Survey 2010/11

Slide 17

….and exports to the RoI have decreased by 1/3rd

Slide 17

NI Sales & Exports 2010/11 relative to 2007/08 peak

-40%-35%-30%-25%-20%-15%-10%

-5%0%5%

10%15%

RoIExports

Rest of EUExports

All Exports NI Sales Rest of theWorld

TotalSales

GB Sales

Source: DFP, figures are in constant prices

Slide 18

…. as house building has dropped by 90%

Slide 18

Republic of Ireland Housing Completions

88,419

9,000

0

20,000

40,000

60,000

80,000

100,000

1991 1994 1997 2000 2003 2006 2009 2012(f)

Source: DoE & UB forecasts90%fall

Slide 19

Declining Disposable Incomes & lack of

ProfitabilityChallenge 1

Slide 20

Oil price is higher now than it was in 2008 look at oil price n sterling not dollars!

Slide 20

Brent Crude Oil Price in Sterling & Dollarsper barrel (pb)

£80.4£73.7 / $147

0

10

20

30

40

50

60

70

80

90

May-07 Jan-08 Oct-08 Jun-09 Feb-10 Oct-10 Jul-11 Mar-12

£pb

0

20

40

60

80

100

120

140

160

180$ pb

$pb Right Hand Scale £pb Left Hand Scale

Source: Bloomberg Record high in sterling

Slide 21

Diesel & petrol prices hit record highs and Call off Duty 3 (pence per litre) never happened….

Slide 21

UK Fuel Prices - Tank* of Petrol / Diesel (60 Litres)

£83.7

£51.6

£87.9

30

40

50

60

70

80

90

100

Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12

Petrol Tank Diesel Tank

63% rise

Source: ONS

**Note Northern Ireland Prices are traditionally the highest of all UK regions

Slide 22

Drinking, smoking & eating are all becoming expensive pastimes particularly after Duty rises – past, present & future…

Slide 22

% Change in UK Consumer Prices since Credit Crunch began (Aug 07 to Feb 12)

0%

10%

20%

30%

40%

50%

60%

Food & Non-Alcoholic

Beverages

Food ElectricityGas & Other

Fuels

TransportFuels &

Lubricants

TransportServices

Total CPI

Source: ONS

Slide 23

Rising food prices due to agricultural inflation…

Slide 23

Agricultural InflationRebased January 2007 = 100

+71%

+40%

+35%

0

50

100

150

200

250

300

Jan-07 Jan-08 Feb-09 Feb-10 Mar-11 Mar-12

Index

Agriculture Wheat Cattle

Source: S&P GSCI Agriculture Index rebased to January 2007 = 100

Slide 24

Exchange rate has played a key part in inflation story…

Slide 24

Sterling / Euro Exchange Rate

1.0

1.1

1.2

1.3

1.4

1.5

1.6

Jan-06 Sep-06 Jun-07 Feb-08 Oct-08 Jul-09 Mar-10 Nov-10 Jul-11 Apr-12

€

Source: Bloomberg

2009/10€1.13

2008/09€1.20

2007/08€1.41

2010/11€1.18

2011/12 to date €1.16

(86.3p)

Slide 25

Exchange rate has played a key part in inflation story…

Slide 25

Sterling / Dollar Exchange Rate

1.2

1.4

1.5

1.7

1.8

2.0

2.1

2.3

Dec-05

Jul-0

6

Feb-07

Sep-07

Apr-08

Nov-08

Jun-0

9

Dec-09

Jul-1

0

Feb-11

Sep-11

Apr-12

$2007/08

$2.01 2008/09$1.71

2009/10$1.61

2010/11$1.56

Source: Bloomberg

2011/12$1.60

Slide 26

Inflation falling but prices still rising at a faster rate than wages…and that’s before benefits & tax changes…

Slide 26

UK Average Weekly Earnings & CPI Inflation

0

1

2

3

4

5

6

Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Feb-12

%

Ave Weekly Earnings 3m Y/Y % (Excl. Bonuses) CPI Y/Y

Source: ONS

Income squeeze

Does not include taxes or changes to

benefits

Slide 27

Discretionary spending hit with consumer confidence also very weak…

Slide 27

21,785 fewer new car sales relative to 2007 peak 12 Month Rolling Sum

47,580 46,923

68,708

30,000

40,000

50,000

60,000

70,000

80,000

Dec-06 Sep-07 Jun-08 Mar-09 Dec-09 Sep-10 Jun-11 Mar-12

Sales now 32% below peak & a new low

Source: SMMT

Temporary reduction in VAT rate to 15% & 'Cash for Clunkers'

Slide 28

….. following rise in dole queue & job insecurity

Slide 28

NI Unemployment Claimant Count Levels

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

Jan-85 Jan-88 Jan-91 Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 Jan-09 Jan-12

Source: DETI

Jan 2012 61,500 now back tolevels last seen Sep

1997

Record low Aug 0723,500

Good Friday Agreement signed April 1998

57,900

Slide 29

Businesses also hit by inflationary pressures but output price deflation squeezes profit margins too…

NI Private Sector Profit Squeeze3 Month Moving Average

30

40

50

60

70

80

Feb-03 Feb-04 Feb-05 Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Feb-12

Output Prices Input Prices No Change

InflationD

eflation

Source: Markit Economics & Ulster Bank NI PMI

Profits squeeze

Slide 30

Decade of De-leverage

Challenge 2

Slide 31

Debt Doctors provide the same medicine the world over…perhaps we in NI should count ourselves lucky

Source: 

The Economist

Source: 

The Economist

Slide 32Slide 32

More borrowing to pay for debt mountain…

UK Public Sector Net Borrowing (PSNB)

0

20

40

60

80

100

120

140

160

2011/12 2012/13 2013/14 2014/15 2015/16 2016/17

£bn

Budget Mar-11 Budget Mar-12Source:OBR

£464bn in 6 years or 17 times the annual output of

the NI economy

Slide 33Slide 33

…without action debt mountain turns to downgrades and potentially default…

Spending

Revenue

Slide 34Slide 34

…what went up must come down. UK (& therefore NI) faces biggest 7-yr spending squeeze on record…

UK Public Spending Growth in Real Terms (excluding Debt Interest & Social Security)

-10

-5

0

5

10

15

1950-51 1961-62 1972-73 1983-84 1994-95 2005-06 2016-17

Y/Y%

Annual 7-year moving average

Source: IFS,

9.3% cut over 7yrs 16.2% cut over 7yrs

Slide 35

NI underperformed the UK during the downturn & is set to underperform during the recovery too

NI v UK Annual Economic Growth in Real TermsGross Value Added (GVA)

-8%

-6%

-5%

-3%

-2%

0%

2%

3%

5%

2007 2008 2009 2010 2011 2012 2013 2014 2015

NI UK

Source:ONS & * UB Calculations, UK GDP used for 2011-2015

Forecasts NI from 2011UK from 2012

NI 2010 outturn expected to be revised to 0%

Slide 36

Decade ahead will HURT

Growth of -0.5% in 2011 (UK= +0.9%, RoI =+0.7%) and -0.5 in 2012 (UK=+0.8%, RoI = +0.2%)

Downside risks to NI growth (EZ crisis & Credit Crunch 2) with an impaired banking system

Unemployment to stay higher for longer…. a lost decade for the under 25’s?

Households face devaluation in S.O.L, debt de-leverage

Factors present in ‘NICE’ era have gone into reverse - Next decade ahead will HURT – Higher Unemployment Rising Taxes / Tariffs

Lower corporation tax a ‘must have’ not an optional extra

Fiscal austerity in NI – it has really only started!

Slide 37Slide 37

Plenty of reasons to be fearful but also several to be cheerful!

Far-off fields (e.g. BRICs & Germany) are greener ……..so diversify export base

Global demand for food & pharmaceuticals to rise well into the future

Housing affordability has improved remarkably

NI’s public expenditure cuts are do-able……. spare a thought for the South

Recent FDI into Titanic Quarter (e.g. Citi) tip of the iceberg?

Titanic Centenary / Irish Open / Olympics 2012, City of Culture / World Fire & Police Games 2013

An opportunity to radically change the economy for the better…. but will it be grasped?

NI requires a relentless focus on cost – the level of public expenditure, how it is spent & where. A forensic analysis of current public expenditure & public service delivery is urgently required

Slide 38

Derry/L’DerryDouble-DipsDissidents

Delay

DevolutionDeferralDelivery

DenialDecommissioningDirect Rule

Deficits DebtDependency

Doom & Gloom

NI has its fair share of D-words too but delivery cannot be delayed!

Slide 39Slide 39

Don’t Despair! Out of crises spring opportunities

“A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty”. Winston Churchill

Slide 40Slide 40

But will we grasp them?

Slide 41Slide 41

DisclaimerThis document is issued for information purposes only for clients of Ulster Bank Group who are eligible counterparties or professional customers, and does not constitute an offer or invitation to purchase or sell any instrument or to provide any service in any jurisdiction where the required authorisation is not held. Ulster Bank and/or its associates and/or its employees may have a position or engage in transactions in any of the instruments mentioned.The information including any opinions expressed and the pricing given, is indicative, and constitute our judgement at time of publication and are subject to change without notice. The information contained herein should not be construed as advice, and is not intended to be construed as such. This publication provides only a brief review of the complex issues discussed and readers should not rely on information contained here without seeking specific advice on matters that concern them. Ulster Bank make no representations or warranties with respect to the information and disclaim all liability for use the recipient or their advisors make of the information. Over-the-counter (OTC) derivates can involve a number of significant and complex risks which are dependent on the terms of the particular transaction and your circumstances. In the event the market has moved against the transaction you have undertaken, you may incur substantial costs if you wish to close out your position.Ulster Bank Limited Registered Number R733 Northern Ireland. Registered Office 11-16 Donegal Square East, Belfast, BT1 5UB. Authorised and regulated by the Financial Services Authority. Member of The Royal Bank of Scotland Group.Ulster Bank Ireland Limited, a private company limited by shares, trading as Ulster Bank, Ulster Bank Group and Bank Uladh. Registered No. 25766. Registered Office Ulster Bank Group Centre, George’s Quay, Dublin 2. Ulster Bank Ireland Limited is regulated by the Financial Regulator. Member of The Royal Bank of Scotland Group.Calls may be recorded.