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Presentation given by the Bank of Ireland’s UK economist, Alan Bridle, to more than 160 guests at a CBI lunch sponsored by the Bank of Ireland
Citation preview
Alan Bridle, UK EconomistCBI Economic Luncheon 18th May 2012
Bank of Ireland UK is a trading name of Bank of Ireland (UK) plc which is authorised and regulated by the Financial Services Authority. Registered in England and Wales (No. 7022885), Bow Bells House, 1 Bread Street, London, EC4M 9BE.
The Regional Economy in 2012
Balance Sheet Recession, Austerity & Growth Challenge
Agenda
Scene-setting - Regional Exposures to UK & Irish Debt issues
“Made in Northern Ireland” – our own Balance Sheet Recession as it plays out
The Business Sector Property Markets The Household Sector Banking & Credit issues
Short & Medium Term Outlook
Base case Planning Assumptions Risks Critical conditions for restoring growth
Concluding Remarks
Rebalancing - The Real Challenge ? Grounds for Encouragement?
Regional Exposure
Sandwiched between two highly indebted economies that had oversized banking sectors and both now set on a necessary course of “deleveraging”
The UK’s limited “recovery” experience to date and scale of debt-reduction plans should govern regional growth and public spending expectations for at least two Parliaments and inform current NI Executive policy-making
Source: FT, Why UK GDP continues to lag G7 (G Davies), 24TH April 2012
A Heavily Indebted & Welfare-dependent Region having to play its part in restoring UK public finances
0
2,000
4,000
6,000
8,000
10,000
12,000
UK
NI
3
4
5
6
7
8
9
10
11
12
2003/04 2005/06 2007/08 2009/10
Net FiscalTransfers
£bnNI public Expenditure per capitarelative to UK (£bn)
DEL + AME DEL only
DLA IB JSA IS
NI 102 34 32 46
UK 54 32 23 29
Claimants per 1,000 people
Sources: PESA, DFP, NOMIS, BOI estimates
Rear view mirror reveals NI’s “recession experience” has greater similarity to ROI than UK
Official ONS data released at the end of 2011 indicates that the contraction in the regional economy was much deeper than previously estimated.
In monetary terms, aggregate regional income/expenditure was estimated to be over £2.0bn or 7.5% lower in 2010 v peak of £29.2bn in 2007 ie the size of the economy is back at 2004 levels.
-10
-9
-8
-7
-6
-5
-4
-3
-2
-1
0
Lon Sco UK SE SW EM NE Y&H NW Wales WM East NI ROI
Annual Economic Growth in Real Terms 2007-2009
20
21
22
23
24
25
26
27
28
29
30
1998 2000 2002 2004 2006 2008 2010
Estimated NI GVA at constant prices 1998-2010£ bn
The size of the NI economy overall is now back at 2004 levels
Sources : ONS, CSO, BOI
The Business Sector
Key private sectors of the NI economy have experienced only a very modest recovery to date and activity levels remain c15% below pre-crisis peak … while 1 in 3 firms indicate they are not profitable
NI Services,Manufacturing and Construction output indices
55
65
75
85
95
105
115
q12005
q1 q12007
q1 q12009
q1 q12011
Services
Manufacturing
Construction
Source : NI Index of Services (Experimental), NI Index of Production, NI Construction Bulletin, bdrc continental
2008=1002008=100
Profit
Broke even
Loss
DK
All UK SMEs NI SMEs
All UK SMEs Q4
NI SMEs Q4
Growth Ambitions in 2012 – while near half of firms say they will stay the same size in the next 12 months, a larger percentage of NI firms plan to
contract/sell/pass on than, than grow substantially.
Growth plans for next 12 months
Source: bdrc continental, March 2012
Current economic climate rated the biggest challenge to business growth in the short-term. NI SMEs more exercised than UK overall by other factors, including finance availability
Main reason for not seeking borrowing – All NI “Would be seekers” Q3-4 only
Principle: prefer not to lose control, or can get funds elsewhere
Process: think it’s too expensive, too much hassle, needs security
Discouraged: had asked informally but felt put off, or assumed would be turned down
Climate: felt it was not the right time to borrow in the current economic climate
Main reason for not applying
All UK SMEs Q4
NI SMEs Q4
Major obstacle to running business in next 3 months
Source: bdrc continental, March 2012
The Property Markets
Very Challenging Climate for all Property segments
Source: LisneySource: Lisney
NI “Retail” segment hit hard by consumer spending retrenchment
Prime yields in all sectors of the local market are now at their highest level in more than a decade but investment volumes remain very muted
Residential Development Land still largely in a state of paralysis – A “Psychology of deflation” still prevails
Valuation estimates heavily depressed, particularly In rural west of the Bann
Source: LisneySource: Lisney
Very limited Open-Market sales volumes, Demand constrained by confidence issues and anticipated weak recovery in housing market.
Key decisions for banks, NAMA and appointed Administrators around disposals and warehousing
Very limited Open-Market sales volumes, Demand constrained by confidence issues and anticipated weak recovery in housing market.
Key decisions for banks, NAMA and appointed Administrators around disposals and warehousing
Residential market still difficult in 2012 - price correction seems well advanced but not yet complete
Pace of annual price decline has slowed, “pockets” of market have stabilised/tentative recovery but overall risks for average prices are still to the downside - further “stock clearing” and difficult macro environment and mortgage market backdrop. Forecasted repossession rates for 2012 still reflecting hangover/legacy issues from regional house price boom of 2006-07.
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 Q1 Q2 Q3 Q4 Q1 Q2 q3 q4 q1
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
0
25000
50000
75000
100000
125000
150000
175000
200000
225000
250000
275000
Average Price RHSTransactions LHS £
Source: QHPI
Forecasted Regional repossession rates 2012 : CML
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 1.1 1.2
NI
London
Scotland
West Mid
North East
Wales
Yorks & Hum
UK
East
East Mid
North West
South East
South West
CML projecting that the rate of repossession in NI will be 3x UK average in 2012
Better than UK average regions
Worse than UK average regions
Household / Consumer sector
Continuing Headwinds on Household Finances / Consumer spending
-12
-10
-8
-6
-4
-2
0
2
NI
Wales
Scotland
UK
England
ROI
New car registrations in 2011 %• A starting position of elevated levels of debt, particularly new mortgage borrowers from the 2005-07 period.
• Falling real living standards – inflation outpaced incomes in 2010, 2011 & 2012?
• Negative “wealth effect” from steep decline in asset values
• Pensions reform – Private (and Public) sectors
• Personal taxation and National Insurance increases – middle and upper income groups squeezed
• UK-wide Welfare and Benefit reforms – recurring impact
• A starting position of elevated levels of debt, particularly new mortgage borrowers from the 2005-07 period.
• Falling real living standards – inflation outpaced incomes in 2010, 2011 & 2012?
• Negative “wealth effect” from steep decline in asset values
• Pensions reform – Private (and Public) sectors
• Personal taxation and National Insurance increases – middle and upper income groups squeezed
• UK-wide Welfare and Benefit reforms – recurring impact
… but inflation has moderated and further falls should be supportive of a gradual recovery in realHH income/expenditure
Household Challenges in 2012
Region’s labour market still softening …The claimant count has now risen to 62.5k(+700 last month)On the claimant count, NI (6.8%) compares unfavourably
with UK average (4.9%). LFS measure contradictory – 6.7% v 8.2%
Increase in claimants largely from lower wage occupations
Source: DETI, Ipsos Mori
-65
-60
-55
-50
-45
-40
-35
-30
-25
-20
-15
-10
-5
0
5
10
15
20
25
30
35
40
1999
Qtr 1
1999
Qtr 2
1999
Qtr 3
1999
Qtr 4
2000
Qtr 1
2000
Qtr 2
2000
Qtr 3
2000
Qtr 4
2001
Qtr 1
2001
Qtr 2
2001
Qtr 3
2001
Qtr 4
2002
Qtr 1
2002
Qtr 2
2002
Qtr 3
2002
Qtr 4
2003
Qtr 1
2003
Qtr 2
2003
Qtr 3
2003
Qtr 4
2004
Qtr 1
2004
Qtr 2
2004
Qtr 3
2004
Qtr 4
2005
Qtr 1
2005
Qtr 2
2005
Qtr 3
2005
Qtr 4
2006
Qtr 1
2006
Qtr 2
2006
Qtr 3
2006
Qtr 4
2007
Qtr 1
2007
Qtr 2
2007
Qtr 3
2007
Qtr 4
2008
Qtr 1
2008
Qtr 2
2008
Qtr 3
2008
Qtr 4
2009
Qtr 1
2009
Qtr 2
2009
Qtr 3
2009
Qtr 4
2010
Qtr 1
2010
Qtr 2
2010
Qtr 3
2010
Qtr 4
2011
Qtr 1
2011
Qtr 2
2011
Qtr 3
2011
Qtr 4
2012
Qtr 1
Net personal financial circumstances
Net general economic condition
Household Confidence levels bumping along the bottom,Claimant increase largely from lower wage occupations
Public sector job insecurity at elevated levels, but exaggerated on evidence to date, with the projected “shake-out” not materialising and reductions much lower than rest of UK.
Source: Ipsos MoriSource: Ipsos Mori
How concerned, if at all, would you say you are about the possibility of being made redundant or becoming unemployed over the next few months?
How concerned, if at all, would you say you are about the possibility of being made redundant or becoming unemployed over the next few months?
20
1818
8
2122
0
5
10
15
20
25
2009
Qtr1
2009
Qtr2
2009
Qtr3
2009
Qtr4
2010
Qtr1
2010
Qtr2
2010
Qtr3
2010
Qtr
4
2011
Qtr
1
All full time workers Public sector Private sector
pwc Spending Review: One Year On
Change in public sector employment by region in year to Q2 2011 (%)Change in public sector employment by region in year to Q2 2011 (%)
The lowest % of losses (1.8%) in the UK despite the highest % of employees. However, the opportunity cost of any job protectionism is the impact on capital budgets & private sector, where the positive multipliers are likely to be greater.
The “Working Poor” – HMRC income tax distribution data provides some indication of the likely disproportionate “squeeze” on the region’s households from higher food, petrol and energy costs – counterbalanced by lower regional taxation v UK ?
£200,0000%
£150,0000%
£100,0001%
£70,0001%
£50,0003%
£30,00014%
£20,00023%
£15,00020%
£10,00024%
£6,47514%
-4.0% -3.0% -2.0% -1.0% 0.0% 1.0% 2.0% 3.0% 4.0%
£6,475£10,000£15,000£20,000£30,000£50,000£70,000
£100,000£150,000£200,000
Percentage point difference between NI and UK (2009/10)
A larger share than the UK
A smaller share than the UK
Income Tax payers in NI, 2009-10 Relative Income Tax payers
Banking & Credit Markets
The Regional Banking Landscape –credit vigilance, balance sheet repair, re-sizing operations
0
20
40
60
80
100
120
2002q1
q4 q3 q2 2005q1
q4 q3 q2 2008q1
q4 q3 q2 2011q1 q4
Company Insolvencies
Creditors Vol
Compulsory
Individual Insolvencies
50
150
250
350
450
550
650
750
850
0
5000
10000
15000
20000
25000
30000
35000
40000
NI
E&W
Mortgage Market stresses
0
200
400
600
800
1000
1200
2007q2
q3 q4 2008q1
q2 q3 q4 2009q1
q2 q3 q4 2010q1
q2 q3 q4 2011q1
q2 q3 q4
Mortagage Arrears,Writs&Summonses
Possession Orders
NI banks lending to the Agriculture sector
500
550
600
650
700
750
800
850
900
950
Sep04
Dec04
Mar05
Jun05
Sep05
Dec05
Mar06
Jun06
Sep06
Dec06
Mar07
Jun07
Sep07
Dec07
Mar08
Jun08
Sep08
Dec08
Mar09
Jun09
Sep09
Dec09
Mar10
Jun10
Sep10
Dec10
Mar11
Jun11
Sep11
Dec11
Mar12
£m
…. & restoring growth in core lending
Sources: Insolvency Service, NI Courts, BBA
Appetite for Credit - 7 out of 10 SMEs in Northern Ireland have no wish, or need to apply for borrowing (similar to UK)
“happy non-seekers” “happy non-seekers”
borrowing eventborrowing event “would-be seekers” “would-be seekers”
Source: bdrc continental, March 2012
Success rate of Credit Applications? c70% according to businesses
Offered what wanted and took it
Have overdraft after issues
Took other funding instead
No overdraft
70% of overdraft applicants now have a facility
Offered what wanted and took it
Have loan after issues
Took other funding instead
No loan
72% of loan applicants now have a facility
Source: bdrc continental, March 2012
Unsecured Credit – while penetration of cards and loans has fallen from peak levels of 2008 & 2009, there is greater evidence of “distress borrowing” by a segment of households in the last 12 months
£553 £590
£268 £295
£955 £995
£0
£100
£200
£300
£400
£500
£600
£700
£800
£900
£1,000
£1,100
£1,200
04/1
-04/
4
04/2
-05/
1
04/3
-05/
2
04/4
-05/
3
05/1
-05/
4
05/2
-06/
1
05/3
-06/
2
05/4
-06/
3
06/1
-06/
4
06/2
-07/
1
06/3
-07/
2
06/4
-07/
3
07/1
-07/
4
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-08/
1
07/3
-08/
2
07/4
-08/
3
08/1
-08/
4
08/2
-09/
1
08/3
-09/
2
08/4
-09/
3
09/1
-09/
4
09/2
-10/
1
09/3
-10/
2
09/4
-10/
3
10/1
-10/
4
10/2
-11/
1
10/3
-11/
2
10/4
-11/
3
11/1
-11/
4
11/2
-12/
1
All credit card holders Always pay back in full Do not always pay back in full
Amount owed on credit card (on most recent statement)
£6,268
£4,467
£3,830 £3,991
£3,000
£3,500
£4,000
£4,500
£5,000
£5,500
£6,000
£6,500
£7,000
£7,500
02/1
-02/
402
/2-0
3/1
02/3
-03/
202
/4-0
3/3
03/1
-03/
403
/2-0
4/1
03/3
-04/
203
/4-0
4/3
04/1
-04/
404
/2-0
5/1
04/3
-05/
204
/4-0
5/3
05/1
-05/
405
/2-0
6/1
05/3
-06/
205
/4-0
6/3
06/1
-06/
406
/2-0
7/1
06/3
-07/
206
/4-0
7/3
07/1
-07/
407
/2-0
8/1
07/3
-08/
207
/4-0
8/3
08/1
-08/
408
/2-0
9/1
08/3
-09/
208
/4-0
9/3
09/1
-09/
409
/2-1
0/1
09/3
-10/
209
/4-1
0/3
10/1
-10/
410
/2-1
1/1
10/3
-11/
210
/4-1
1/3
11/1
-11/
411
/2-1
2/1
Personal loans Personal loans taken out in the last year
Average personal loan amount
Source: Ipsos MORI
Savings – Some rediscovering the virtues of thrift – the long decline in savings penetration being “arrested” in the <35 age cohort (student finance and mortgage market developments?)
21%
27%29%
32%32%
31%
15%
20%
25%
30%
35%
40%
45%
50%
55%
60%
00/1
-00/
400
/2-0
1/1
00/3
-01/
200
/4-0
1/3
01/1
-01/
401
/2-0
2/1
01/3
-02/
201
/4-0
2/3
02/1
-02/
402
/2-0
3/1
02/3
-03/
202
/4-0
3/3
03/1
-03/
403
/2-0
4/1
03/3
-04/
203
/4-0
4/3
04/1
-04/
404
/2-0
5/1
04/3
-05/
204
/4-0
5/3
05/1
-05/
405
/2-0
6/1
05/3
-06/
205
/4-0
6/3
06/1
-06/
406
/2-0
7/1
06/3
-07/
206
/4-0
7/3
07/1
-07/
407
/2-0
8/1
07/3
-08/
207
/4-0
8/3
08/1
-08/
408
/2-0
9/1
08/3
-09/
208
/4-0
9/3
09/1
-09/
409
/2-1
0/1
09/3
-10/
209
/4-1
0/3
10/1
-10/
410
/2-1
1/1
10/3
-11/
210
/4-1
1/3
11/1
-11/
411
/2-1
2/1
16-24 25-34 35-44 45-54 55-64 65+ £5,081
£5,974
£15,653
£6,851
£26,504
£13,323
£0
£5,000
£10,000
£15,000
£20,000
£25,000
£30,000
00/
1-0
0/4
00/
2-0
1/1
00/
3-0
1/2
00/
4-0
1/3
01/
1-0
1/4
01/
2-0
2/1
01/
3-0
2/2
01/
4-0
2/3
02/
1-0
2/4
02/
2-0
3/1
02/
3-0
3/2
02/
4-0
3/3
03/
1-0
3/4
03/
2-0
4/1
03/
3-0
4/2
03/
4-0
4/3
04/
1-0
4/4
04/
2-0
5/1
04/
3-0
5/2
04/
4-0
5/3
05/
1-0
5/4
05/
2-0
6/1
05/
3-0
6/2
05/
4-0
6/3
06/
1-0
6/4
06/
2-0
7/1
06/
3-0
7/2
06/
4-0
7/3
07/
1-0
7/4
07/
2-0
8/1
07/
3-0
8/2
07/
4-0
8/3
08/
1-0
8/4
08/
2-0
9/1
08/
3-0
9/2
08/
4-0
9/3
09/
1-0
9/4
09/
2-1
0/1
09/
3-1
0/2
09/
4-1
0/3
10/
1-1
0/4
10/
2-1
1/1
10/
3-1
1/2
10/
4-1
1/3
11/
1-1
1/4
11/
2-1
2/1
Under £20,000 £20,000 - £39,999 £40,000 or more
£12,298
£6,237£8,934
£5,200 £3,364
£1,037
£0
£1,000
£2,000
£3,000
£4,000
£5,000
£6,000
£7,000£8,000
£9,000
£10,000
£11,000
£12,000
£13,000
£14,000
£15,000
00/1
-00/4
00/2
-01/1
00/3
-01/2
00/4
-01/3
01/1
-01/4
01/2
-02/1
01/3
-02/2
01/4
-02/3
02/1
-02/4
02/2
-03/1
02/3
-03/2
02/4
-03/3
03/1
-03/4
03/2
-04/1
03/3
-04/2
03/4
-04/3
04/1
-04/4
04/2
-05/1
04/3
-05/2
04/4
-05/3
05/1
-05/4
05/2
-06/1
05/3
-06/2
05/4
-06/3
06/1
-06/4
06/2
-07/1
06/3
-07/2
06/4
-07/3
07/1
-07/4
07/2
-08/1
07/3
-08/2
07/4
-08/3
08/1
-08/4
08/2
-09/1
08/3
-09/2
08/4
-09/3
09/1
-09/4
09/2
-10/1
09/3
-10/2
09/4
-10/3
10/1
-10/4
10/2
-11/1
10/3
-11/2
10/4
-11/3
11/1
-11/4
11/2
-12/1
Total value of savingsValue of savings in main savings accountValue of savings in other savings accounts
Savings account penetration by age
Total value of savings by household income
Average savings amount
Source: Ipsos MORI
Short & Medium Term Outlook
Base Case Planning Assumption - short & medium term UK & NI regional economic growth on a significantly lower trajectory compared to pre-crisis. Regional-specific and structural factors likely to ensure NI GDP rates “lag” UK (and ROI) in recovery phase
Sources : ONS, OBR UK Budget Forecasts 2011, BOI analysisSources : ONS, OBR UK Budget Forecasts 2011, BOI analysis
-6
-4
-2
0
2
4
6
1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
UKNorthern Ireland
“The Great Reassession”“The Great Reassession”
“The Great Recession”“The Great Recession”
“The Great Expansion”“The Great Expansion”
% annual change% annual change
potential for downwards revision
2012 2013 2014 2015 2016
NI 0.0 0.5 1.0 1.25 1.5
UK 0.5 1.7 2.3 2.5 2.5
ROI 0.5 1.4 2.9 3.0 3.0
GDP forecasts % change
Key Risks• pace of UK & ROI recoveries?• diminishing financial assistance without offset policy levers
Monetary “dynamics” just beginning to change for the region
Monthly QGBPEUR= 31/08/2004 - 30/04/2012 (UTC)
Line, QGBPEUR=, Bid(Last)31/05/2012, 1.2470
Price
EUR
.1234
1.08
1.12
1.16
1.2
1.24
1.28
1.32
1.36
1.4
1.44
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 Q1 Q2
2004 2005 2006 2007 2008 2009 2010 2011
UK “policy” interest rates projected to be lower for longer but “market” rates showing signs of “de-coupling” / tightening
…. while Sterling/€uro appears to madea break to the upside
winners and losers …
Critical Conditions for restoring buoyancy and growth to the regional economy
Stabilising the Banking system
Credible delivery of long-term UK deficit-reduction
Structural economic reform
A widening & diversified export base
A revival in private investment and public infrastructure
Stabilising the housing & property markets
… and the avoidance of further external shocks!
Potential Growth Sectors
Agri - food Technology
Pharma & Health sciences “Green” –
renewables, Niche/high value manufacturing Tourism
Creative Industries Regulatory /
Compliance Private Health / Private Education
Traditional - housebuilding
Concluding Remarks
The Real Rebalancing challenge – from Consumption to Production (Business Investment & Net Trade)
-35 -20 -5 10 25 40 55 70 85 100 115
Germany
France
US
UK
NI
Composition of GDP in Germany, France, US, UK, 2009 % (compared with estimated GVA profile of NI region)
Net Trade
HH Consumption
Govt Consumption
Investment
Source: CBI "A vision for rebalancing the economy", BOI Analysis
The UK economy (especially regions such as Northern Ireland) are dominated by Household and Government Consumption and economic growth has become less balanced and weaker since the 1970’s. For UK (and NI), echoes of the mid-1970’s “Too Few Producers” thesis. A Time to re-visit ?
While the short-term outlook remains very challenging, there is some basis
for encouragement to support a gradual return to growth …
Despite the budget squeeze, present and future, public expenditure per head is still over 20% above the UK average (still over 200,000 public sector jobs in 2014-15?)
Overall levels of debt are falling to more sustainable levels & the “impairment cycle” for the financial sector is progressing (but not complete)
Improved affordability for residential and commercial property – now more aligned to regional economic and financial fundamentals
“Subsets” of the private sector continue to outperform (Tourism Revenues 2012&13)
Low regional tax burden for households that sustains a level of spending (but with an associated opportunity cost!)
Still almost 700,000 employee jobs (c 600,000 mid-90’s)
Edging closer to D-Day for corporation tax decision
Alan BridleUK Economist / Market AnalystBank of Ireland UKalan.bridle@boini.com028 9043351907736362138
This document is for information purposes only. Bank of Ireland UK is not soliciting any action based upon it and professional advice should be obtained before acting on any information contained herein.This document is based upon information as at Wednesday 16 th May 2012 that we consider reliable but we do not represent that it is complete and it should not be relied upon as such. The Material in this document should not be reproduced in any form without the express permission of Bank of Ireland UK
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