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
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