Economic Outlook and current state of the Northern Ireland EconomyAngela McGowan

Chief Economist

Northern Bank

Prepared November 2011

Click icon to add picture

Current state of NI economy

• The Bigger picture:• - Global / European crisis• - UK economy

• SWOT analysis for NI economy• Headline indicators• Economic outlook

• Discussion - making choices

Global recovery 4% per year – long period of slow growth:

Extra hit from the recent financial shock – long-term damage

BUT we expect some rebound in Q4 from: - low inventory levels - lower oil and food prices

West is trapped in low growth and elevated unemployment rates – Emerging mks – 6% growth

The Global Picture .....

• Headwinds from early 2011 (oil and food price shock / Japanese earthquake and Chinese policy tightening) starting to fade. But Aug/ Sept financial shock took its toll.

• There will be long-term damage from the shocks to the global economy this year. The job engine has not started and we now face significant policy tightening in advanced economies.

• As a consequence, central bank rates in the US, Europe and Japan will be kept low for the foreseeable future.

We do not expect a global recession but Europe is a high risk and is expected to contract for at least one quarter. • We don’t believe the Q3 shock was big enough to

trigger a GLOBAL recession (but another hit of 10-15% wuld do it)

• But – it will have an impact upon business and consumer behaviour in Q3 - inventories will be cut

• - investment plans postponed• Consumers will probably spend less

Remember:

- many headwinds are turning into tailwinds and will pull growth upward

- Interest rates will provide some support

But risks remain high around the Eurozone:

• European crisis is the biggest risk at moment.

• This week markets will focus on: - Greece – will it pass the austerity package?- Italy - negotiations over potential pension reform are

expected to continue. Risk of a government reshuffle in Italy remains in focus.

• At the ECOFIN meeting (today), the Ministers of Finance will “discuss the follow-up to the decisions taken” at the EU Summit.

• Markets would like a lot more detail to reduce uncertainty

The Worst case scenario The good alternative

• This scenario centres on a further worsening of sentiment in the interbank markets.

• A tightening of credit standards and drop in asset prices would result in slowing production /rising U and a drop in investments and consumption

• - another global financial crisis would lead to recession in the Western economies and dampen growth in Asia.

• The impact on the real economy would be very severe – particularly in the Euro area – with no room for a fiscal response.

- European leaders would make appropriate moves - to restructure

Greek debt / recapitalise banks etc √√

- Growth and risk sentiment would improve markedly on the back of a strong turnaround in the global manufacturing cycle – with China leading

- China would be willing to support the European Financial Stability Facility.

- US continues to recover.

- The interbank market normalises

European debt levels: 17 members

04/15/2023 8

Debt levels have an impact on a country’s ability to borrow

Current state of play

• The ECB cut its key policy rates by 25bp. (downside risks to economic growth -forecast a mild European recession).

• Will probably cut its key rates another 25bp in December.

• The relief that followed after the EU summit last week was short-lived - market is not happy about the lack of detail in the 'comprehensive package'.

• Market sentiment could worsen - but if Italy commits to reforms +G20 delivers a constructive solution + Greek salvage gov’t - all this could be positive for this week.

• Unfortunately, none of these events will be a permanent game changer.

Data suggests UK recovery is still struggling..............UK – Recovery stalling

Unemployment levels risen to 8.1% - labour market flexibility

After 0.1% growth in Q2, ONS estimate Q2 0.5% but -UK in trouble before EU crisis took hold

Problems remain:

Austerity already having an impact on domestic spending

Europe – potential impact for Exports and bank exposures

Inflation still high (5.2% – Sept11)

UK : THE PRESSURE IS ON

UK Exports are the only thing holding up.........

The outside impact on Northern Ireland?

• UK Austerity will have some impact on local public spending – but also huge impact upon confidence.

• European crisis – again an impact upon confidence /investment and potential to hit exports.

• Unemployment risen• Access to finance impact

GVA growth (%)

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

Q1 2006

Q3 2006

Q1 2007

Q3 2007

Q1 2008

Q3 2008

Q1 2009

Q3 2009

Q1 2010

Q3 2010

Q1 2011

Q3 2011

Q1 2012

Q3 2012%

NI

UK

Northern Ireland Economic Overview: weak growth ahead and potential for rising unemployment levels is high Since emerging from recession in late 2009, Northern Ireland is also experiencing a very weak recovery

The indicators suggest a sluggish labour in terms of job creation but//unemployment is now at 7.6% (8.1% in UK and 14.4% in RoI)

A fall back into recession cannot be ruled out (probability estimated to be in the region of 25%)

Revisions to sickness benefit could have huge impact

Source: Oxford Economics & Northern Bank August 2010

Consumer confidence and demand collapsed! Sept 11

SWOT analysis for NI economy

strengths

• Infrastructure• Young population• Good education system

(top)

• World–class universities• Smallness /access***• English Speaking• History of Industrial

success / innovation• Political ethos –

democratic and value equality

weaknesses• Low productivity• Small private sector • Smallness***

- economies of scale /- regional restrictions – taxationRecovering from a housing bubble

• Large tail of underachievement• Youth unemployment levels• Economic and social exclusion – LTU• Skills gap• No growth of knowledge

economy • Export / R&D / clusters / start-up

levels• Education system – elitist /

creativity

SWOT analysis for NI economy

Opportunities• University research –

more spin offs• International goodwill /

Diaspora• Growing demand from

Emerging Markets• Connectivity with RoI

and rest of UK• More partnerships PPPs• Taxation autonomy

Threats• Global downturn• Unemployed youth (18%)• Austerity measures• Subvention £9billion• LT Energy supply and cost• Political resistance to

raising local revenue streams:

• - water / rates / health service

Employment in the knowledge economy as % of total employment (NISC CONNECT report 2011)

Business start-ups per 100,000 of the population in the UK

Private sector R&D levels (BERD) extremely low...

Discussion - making economic choices

• Q: What does society actually want?• levels of taxation V levels of public spending ?• intervention V free market ? somewhere in between?

Regulation – how much? Where? – environmental / financial / etc

Regional economic dependence V Independence• Where should our job creation come from?

• – local enterprise and new firm start-ups?• - Foreign investors?• - mixture of both?

- Low or high risk economic strategy? Middle ground?Economics is about optimum use of available resources - but we still need to make

choices according to social consensus. (e.g current school system)• HOWEVER - for that decision making we need better information - we need to know

who will benefit? What is the cost? Who will carry the risk ? What are the alternatives?

• - Who is responsible for getting us there – politicians / private sector – social partnership consensus approach?

For up-to-date info check out the website:www.northernbank.co.uk/economy