1
Global & Irish Economic Outlook
17 February 2011
John Beggs
Chief Economist
AIB Global Treasury
2
Challenges
Restore order to public finances
Boost jobs and skills
Support existing and find new sources of economic
growth
Stabilise the banking system
Restore public trust and confidence
Risks and uncertainties in world economy
3
Economic recovery underway in 2011
Irish GDP (Yr-on-Yr % Change)
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 (f) 2011 (f) 2012 (f) 2013 (f)
Source: Thomson Datastream, AIB ERU
4
Wide range of views on Irish GDP prospects
% change in real
terms
2010 2011 2012 2013 2014 2015
National
Recovery Plan
0.3 1.7 3.2 3.0 2.8 NA
European
Commission
-0.2 0.9 1.9 2.5 3.0 3.0
IMF -0.2 0.9 1.9 2.4 3.0 3.4
AIB -0.5 1.0 3.0 3.5 4.0 4.5
5
Wide variation on outlook for domestic demand
% change in
real terms
2010 2011 2012 2013 2014 2015
National
Recovery Plan
-3.8 -0.8 1.1 1.5 1.6 NA
European
Commission
-4.3 -3.4 -0.7 0.4 1.4 1.5
IMF -4.1 -2.2 0.5 1.2 1.9 2.9
AIB -5.1 -3.3 0.8 2.1 2.3 3.3
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Ireland exporting its way out of recession
Irish Exports of Services (Volume Yr-on-Yr % Change)
-8
-4
0
4
8
12
16
Q1-04 Q3-04 Q1-05 Q3-05 Q1-06 Q3-06 Q1-07 Q3-07 Q1-08 Q3-08 Q1-09 Q3-09 Q1-10 Q3-10
Source : CSO
Irish Industrial Production Volume: 3 Mth Moving Average Y/Y %
-10
-5
0
5
10
15
Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10
Source: Thomson Datastream
7
Drag from domestic demand will abate over time
GDP Contributions (2008-2012)
-15
-12
-9
-6
-3
0
3
6
2008 2009 2010(f) 2011(f) 2012(f)
Personal Spending Govt Spending Stocks & Fixed Investment Net Exports
%
Source: CSO and AIB ERU forecasts
8
Advanced economies stuck in slow lane
% change volume 2009 2010 2011 2012
Global -0.6 5.0 4.4 4.5
Advanced Economies -3.4 3.0 2.5 2.5
US -2.6 2.8 3.0 2.7
UK -4.9 1.7 2.0 2.3
Eurozone -4.1 1.8 1.5 1.7
Emerging Economies 2.6 7.1 6.5 6.5
World Trade -10.7 12.0 7.1 6.8
Source: IMF World Economic Outlook, Update January 2011
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Euro in narrow range against key currencies
Euro / $
Exchange Rate
Sterling / Euro
Exchange Rate
E u r o / $ E x c h a n g e R a t e
F M A M J J A S O N D J F1 . 1 5
1 . 2 0
1 . 2 5
1 . 3 0
1 . 3 5
1 . 4 0
1 . 4 5
S o u r c e : T h o m s o n D a t a s t r e a m
S t e r l i n g / E u r o E x c h a n g e R a t e
F M A M J J A S O N D J F0 . 8 0
0 . 8 2
0 . 8 4
0 . 8 6
0 . 8 8
0 . 9 0
0 . 9 2
S o u r c e : T h o m s o n D a t a s t r e a m
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Official interest rates set to rise
Official Interest Rates in the US, UK and Eurozone (%)
0
1
2
3
4
5
6
7
Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10
Fed Funds
Source: Thomson Datastream
ECB Repo Rate
BoE Bank Rate
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Domestic spending still contracting, albeit at slower pace
National House Price Inflation
-10
-8
-6
-4
-2
0
2
4
6
Q1-03 Q1-04 Q1-05 Q1-06 Q1-07 Q1-08 Q1-09 Q1-10
-20
-15
-10
-5
0
5
10
15
20
Quarter-on-Quarter : LHS Year-onYear : RHS
% %
source: permanent tsb/ESRI
Housing Completions
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
100,000
1970 1975 1980 1985 1990 1995 2000 2005 2010 (f)
Source: CSO; DoEHLG and AIB ERU forecasts
Housing Repayment Affordability *
10
14
18
22
26
Q1 96 Q1 97 Q1 98 Q1 99 Q1 00 Q1 01 Q1 02 Q1 03 Q1 04 Q1 05 Q1 06 Q1 07 Q1 08 Q1 09 Q1 10
* % of disposable income required for mortgage repayments for 2
income household, 30 year 92% mortgage.
Based on permanent tsb/ESRI national house price
Sources: AIB, permanent tsb/ESRI, CSO, Dept of Finance,
AIB ERU Calulculations
%
Irish Personal Savings Rate (%)
0.0
2.5
5.0
7.5
10.0
12.5
2001 2002 2003 2004 2005 2006 2007 2008 2009 (e) 2010 (f) 2011 (f) 2012 (f)
Source: CSO, AIB ERU
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Irish retail sales flat
Irish Retail Sales (Volume, Yr-on-Yr % Change)
-25
-20
-15
-10
-5
0
5
10
Q1 2006 Q3 2006 Q1 2007 Q3 2007 Q1 2008 Q3 2008 Q1 2009 Q3 2009 Q1 2010 Q3 2010
Source: Thomson Datastream
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Consumer confidence remains weak
Consumer Confidence (ESRI - KBC)
20
40
60
80
100
120
Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
Source: ESRI - IIB, Thomson Datastream
Confidence Indicator
Expectations Component
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Irish inflation makes reappearance
Irish Inflation (Annual CPI and HICP Measures)
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
Mar-07 Aug-07 Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10 Dec-10
CPI HICP
Source:Thomson Datastream
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Productivity growth to pick up
Irish Whole Economy Productivity Growth (4 year moving average %)
0.0
1.0
2.0
3.0
4.0
5.0
1974 1978 1982 1986 1990 1994 1998 2002 2006 2010
Source: CSO, AIB ERU Calculations
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Positive employment trends from 2012
2008 2009 2010 2011 2012 2013
Unemployment Rate % (average) 6.3 11.8 13.3 13.2 12.8 12.0
Labour Force Growth % 0.8 -2.4 -2.5 -1.6 0.0 0.5
Employment Growth % -1.1 -8.2 -4.1 -1.5 0.5 1.5
Net Immigration : Year to April (‘000) 39.0 -7.8 -34.5 -50.0 -35.0 -20.0
Source: CSO and AIB ERU forecasts
Easing in the pace of job losses in 2010 as
downturn in construction well advanced
Rise in unemployment levels out as
redundancies ease and emigration rises –
Live Register fell in three of the last four
months of 2010
Unemployment rate expected to average
around 13.25% in 2010 and 2011 before
falling to 12% by 2013
Unemployment Rate (%)
3
5
7
9
11
13
15
Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10
Source: Thomson Datastream
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Banking recapitalisation costs add to fiscal deficits
% of GDP 2008 2009 2010(f) 2011(f) 2012(f) 2013(f)
2014(f)
General Gov Deficit 7.3 14.4 31.9* 9.4 7.3 5.8 2.8
Gross General Gov Debt 44.3 65.5 94.2 98.6 102.0 102.5 100.0
Actual National Debt** 28.0 47.0 60.0 70.0 76.5 79.5 78.5
*To comply with Eurostat rules, the Gen Gov deficit and debt figures in 2010 include the cost of capital injections
into banks via promissory notes (some 20% of GDP) even though these funds are to be put in over the next 15
years and not in 2010. Thus, the underlying Gen Gov deficit in 2010 is 11.6% of GDP.
** The actual National Debt provides for bank promissory notes, not in 2010, but as funded each year by
Exchequer (€3.1bn from 2011 onwards) and also nets off cash balances (€16 billion). It stood at €93.5 billion at
end 2010 (60% of GDP).
Source: Dept of Finance, NTMA and AIB ERU
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% change in real terms unless
stated
2008 2009 2010 (f) 2011(f) 2012(f) 2013 (f)
GDP -3.5 -7.6 -0.5 1.0 3.0 3.5
GNP -3.5 -10.7 -2.8 -0.5 2.0 2.5
Personal Consumption -1.5 -7.0 -1.0 -1.0 1.0 2.0
Government Spending 2.2 -4.4 -5.0 -5.0 -2.0 -2.0
Fixed Investment -14.3 -31.0 -26.8 -11.0 3.0 7.0
Contribution of stocks to GDP
growth (%)
-0.8 -1.4 1.5 0.0 0.1 0.1
Domestic Demand -5.1 -13.9 -5.1 -3.3 0.8 2.1
Exports -0.8 -4.1 8.7 6.5 5.5 5.5
Imports -2.9 -9.7 5.4 3.0 4.0 4.5
HICP (%) 3.1 -1.7 -1.6 1.4 1.5 1.5
Personal Savings ratio (%) 5.2 11.0 12.0 11.0 9.7 8.0
Construction Investment
as % GDP
16.0 11.4 7.7 5.9 5.7 5.9
Current Account as % GNP -6.6 -3.7 -1.3 0.6 0.3 0.0
AIB Irish Economic Forecasts (2010-2013)
Source: CSO, AIB ERU Forecasts
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Summing up
Narrow based recovery underway
Global economy supportive
Some improvement in Irish cost and price competitiveness
Exports of goods and services could surprise on upside
Construction sector well below trend but limited scope for recovery
Consumer sector hampered by uncertainty over jobs, fiscal policy
Employment to recover by 2012 but unemployment to remain high
Credible fiscal path and sort out banks essential if pressure to lift
on sovereign
Economic news flow should improve – help to rebuild confidence
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Factors for strong medium term growth remain intact
Ireland strongly positioned in international recovery
Very open economy will continue to benefit from globalisation and FDI
Large, modern, diversified, export base that will benefit from global recovery
Ireland remains committed to its low corporate tax regime
Competitiveness expected to improve further, building on the considerable progress already
made from large price and wage falls
Internal structural factors remain positive for cyclical recovery
Young, flexible population
Housing output will need to rise from extremely low 2011 levels
Public infrastructure still at active stage of development
Scope for rebound in depressed consumer spending and business investment
High personal savings rate (estimated at 12% in 2010)
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Note: All Irish data in tables are sourced from the CSO unless otherwise stated. Non-Irish data are from the IMF, OECD and Thomson Financial. Irish forecasts are from AIB Economic
Research Unit. This presentation is for information purposes only and is not an invitation to deal. The information is believed to be reliable but is not guaranteed. Any expressions of opinions are subject to change without notice. This publication is not to be reproduced in
whole or in part without prior permission. Allied Irish Banks p.l.c. is regulated by the Central Bank of Ireland.
Economic Research Unit
www.aibeconomicresearch.com