Download - In the slow lane of recovery
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In the slow lane of recoveryCBI Economic Luncheon
18th May 2010
Alan Bridle
Head of Economics
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Agenda
Context – The regional challenge
Lagging not Leading
Devolution and “climate change”
Prospects & concluding thoughts
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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
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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
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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
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Lagging not Leading
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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
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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
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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 ?
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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
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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
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Devolution and “climate change”
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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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