Presentation to Northern Regional College Acumen Business Leadership event, May 30, 2013

1. NRC Northern Regional College
Acumen Business Leadership Event
Northern Ireland Economic Performance &
Prospects
30th May 2013
Richard Ramsey
Chief Economist Northern Ireland
richard.ramsey@ulsterbankcm.com

2. Slide 2
Global Output - PMI
25
30
35
40
45
50
55
60
65
Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13
Total Manufacturing Services
Source: Markit Economics
ExpansionContraction
With the global economy still growing…

3. Slide 3
… & equities at or near record highs: is everything OK?
“Yeah, but, no but, yeah but…”
Economists sound like
Vicky Pollard

4. Slide 4
“Look into my eyes, the eyes, not around the eyes, look
into my eyes, you’re under”
If there’s doom & gloom… perhaps its time for a
hypnotist

5. Slide 5
One chart should remind us where we are
Slide 5

6. Slide 6Slide 6
The UK economy is not in great shape
Source: Financial Times 12th March 2013

7. Slide 7
Europe has become a key issue in politics & economics
Financial Times 16 May 2013

8. Slide 8
May 31, 2013 – Page 8 © Ulster Bank
The European issues of the last the last 3 years
have not gone away…
?

9. Slide 9
And we have had some new ones too!

10. Slide 10
Concern in Europe has shifted from financial to
economic indicators… economic growth
GDP Consensus Forecasts April 2013
-8
-6
-4
-2
0
2
4
6
U
S
EZ
G
erm
any
France
U
K
Italy
Spain
G
reece
R
oI
Portugal
N
I*
% Y/Y
2012 2013 2014
Source:Consensus Economics & *Ulster Bank

11. Slide 11
Recovery well under way in some economies – focus on
levels of GDP not just growth rates
Recession & Recoveries
(% GDP Change Since Pre-Recession Peak as of Q1 2013, *is Q4 2012)
-3.3%
+3.2%
-2.6%
-7.7% or -9.4%
using GNP
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21
Time in Quarters, Pre-Recession GDP Peak = 0
US EZ UK RoI*
Source: Bloomberg & CSO

12. Slide 12
Spain, Portugal, Greece and Italy are still contracting!
Recession & Recoveries
(% GDP Change Since Pre-Recession Peak as of Q4 2012)
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Time in Quarters, Pre-Recession GDP Peak = 0
Portugal Ireland Italy Spain Germany France
Source: Bloomberg & UB Calculations @ -25%

13. Slide 13
The human recession is becoming politically unbearable
€€
Source: www.zerohedge.com

14. Slide 14Slide 14
No quick‐fix – the ‘Juncker Conundrum’
“We all know what we need to do, we just don’t know how
to get re‐elected after doing it”
Jean‐Claude Juncker – Former President of the Euro Group (January 2005 – January
2013) & current Luxembourg Prime Minister. Quote November 2012.

15. Slide 15
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
1998-2007 N.Ireland’s ‘NICE’ decade

16. Slide 16
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

17. Slide 17
NI enjoyed Southern Comfort through the Celtic Tiger years
WealthTrade Tourism Investment WealthWealthTradeTrade TourismTourism InvestmentInvestment

18. Slide 18
Eurozone’s fastest growing economy was on NI’s
doorstep. But what went up ……
• ISEQ +101% & +231%
(5yr/10yr prior to Feb‐2007 peak)
• House Completions +162%
(10yr prior to 2006 peak)
• 33% rise in employment (Q3 1998 – Q3 2007)
• Annual GDP growth 6.7%
(1998‐2007; averaged 5% 2002‐2007)
• House prices +269%
(10 years prior to Sep‐2007 peak)
• NI manufacturing exports to RoI +81%
(6 years to 2007/08)

19. Slide 19
Trade
Tourism Wealth
Investment
TradeTrade
TourismTourism WealthWealth
InvestmentInvestment

20. Slide 20
ISEQ ‐81% / ‐62%
House Completions ‐91% / ‐91%
Unemployment Rate* (*peak
U% rate)
15.0% / 14.1%
Employment ‐15.1% / ‐14.7%
GDP ‐9.9% /‐7.7%
House Prices ‐50% / ‐50%
NI manufacturing exports to
RoI
‐34% / ‐32%
NI manufacturing excl. Food &
Drink
‐58% / ‐58%
Peak to Trough Decline* / Latest Position
Southern Discomfort hangover continues

21. N.Ireland downturn by numbers 10 Facts
1. Unemployment (claimant count) up 41,500 (Mar 2012)
2. Workforce jobs have fallen by almost 55,000 in 4 yrs to June 2012
3. Personal insolvencies have doubled since 2007 & still rising
4. Corporate insolvencies have doubled since 2007 & still rising
5. House prices down 56% from peak (by Q4 2012)
6. House completions down 66% from 2006 peak & still falling
7. Mortgages for home movers at lowest level since 1974
8. Almost 1 in 4 retail outlets are vacant in Belfast
9. New car sales are 30% below 2007 levels
10. Consumer prices (UK CPI) up 20% since August 2007

22. So it is cabs
Economic Advice
for hire
It’s the economy so it is!

23. Slide 23Slide 23
What changes has “So it is” cabs seen over the last 5 years?
-21%
2007-2012
-31%
2008-2012
-32%
2007-2011
-83%
2007-2011

24. Slide 24
NI Composite Economic Index: Private Sector
2nd recessionary
dip
3rd recessionary dip
1st recessionary
dip
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
2002 Q4 2004 Q4 2006 Q4 2008 Q4 2010 Q4 2012 Q4
Q/Q Growth
85
90
95
100
105
110
115
120
Index 2009 = 100
Q/Q Index
Source: DFP, Index 2009 = 100
Private sector recovery underway? Look at levels of output!

25. Slide 25
Construction output over 40% below peak
NICEI Private Sector Relative to Pre-Recession Peaks
As of Q4 2012 (Peak = 0)
-13.5%
-11.0%
-15.3%
-41.2%
-50%
-40%
-30%
-20%
-10%
0%
10%
0 2 4 6 8 10 12 14 16 18 20 22 24
Time in Quarters Since Pre-Recession Output Peak
Private Sector Private Sector Services
Industrial Production Construction

26. Slide 26
NI’s economic recovery has quite a bit to go!
NI Composite Economic Index & Component Indices
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
Industrial
Production
Construction Private Sector
Services
Private Sector Public Sector NICEI
%
Peak to Trough Recovery from Trough Q4 2012 Relative to Peak
Source: DFP
Peak Q4 2007
Peak Q2 2007
Peak Q2 2007
Peak Q3 2006
Peak Q2 2007
Peak Q3 2009

27. Slide 27
‘Winners’ during the downturn…
Slide 27
Industrial Group % Change
Recession Winners ↑↑↑
Other Services 50.2%
Chemicals & Pharmaceutical Products 26.9%
Utilities (Electricity & Gas) 24.3%
Food, Drink & Tobacco 9.9%
Transport, Storage & Communications 5.5%
Wholesale & Retail Distribution, Accommodation & Food Service 1.4%
Agriculture (Gross annual output in real terms 2007‐12) 0.5%
Source: DFP Indices of Production, Services and Construction, DARD & Ulster Bank calculations
Change in NI Private Sector Output
Q2 2007 ‐ Q4 2012

28. Slide 28
….outnumbered by ‘losers’ & ‘big losers’
Slide 28
Construction /
property
related
Construction /
property
related
Industrial Group % Change
Recession Losers ↓↓↓
Utilities (Water Supply & Waste Management) ‐4.2%
All Production Industries ‐9.3%
Engineering & Allied Industries ‐10.2%
All Private Sector Services ‐10.6%
All Manufacturing ‐14.4%
Total Private Sector Output (Construction + Production + Private Services) ‐14.5%
Recession Big Losers ↓↓↓
Basic Metals & Fabricated Metal Products ‐20.7%
Total Other Manufacturing ‐29.3%
Textiles & Textile Products ‐29.7%
Mining & Quarrying ‐33.3%
Wood & Paper Products ‐34.9%
Rubber, Plastics & non‐metal Products ‐39.5%
Construction ‐44.8%
Business Services & Finance ‐47.7%
Source: DFP Indices of Production, Services and Construction, DARD & Ulster Bank calculations
Change in NI Private Sector Output
Q2 2007 ‐ Q4 2012

29. Slide 29
Decreases in output leads to declines in employment
Slide 29
Northern Ireland Employee Jobs
693,340
613,250
Q2 1998
733,050
500,000
550,000
600,000
650,000
700,000
750,000
Q2 1993 Q4 1995 Q2 1998 Q4 2000 Q2 2003 Q4 2005 Q2 2008 Q2 2010 Q4 2012
Source: DFP
Discontinuity in Series

30. Slide 30
Declining Disposable
Incomes / Profitability
Challenge 1

31. Slide 31
Household incomes recovery remains a long way off
UK Average Weekly Earnings & CPI Inflation
0.8%
2.4%
0
1
2
3
4
5
6
Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13
%
Ave Weekly Earnings 3m Y/Y % (Excl. Bonuses) CPI Y/Y
Source: ONS
Income
squeeze
Does not include taxes
or changes to benefits

32. Slide 32
Fuel is eating up more of our disposable incomes…
UK Fuel Prices - Tank* of Petrol / Diesel
(*60 Litres)
£51.3
£80
£83
£88.8
30
40
50
60
70
80
90
100
May-05 May-06 May-07 May-08 May-09 May-10 May-11 May-12 May-13
£
Petrol Tank Diesel Tank
56%
rise
Source: ONS
**Note Northern Ireland Prices are traditionally the highest of all UK regions**
'Credit Crunch'
begins
June Budget
2010

33. Slide 33
So is food…
Cumulative % Change in UK Consumer Prices
since 'Credit Crunch' began (Aug 07 to Apr 13)
8.2%
20.2%
0%
10%
20%
30%
40%
50%
60%
70%
Food &
Non-
Alcoholic
Beverages
Food Electricity
Gas &
Other
Fuels
Transport
Fuels &
Lubricants
Transport
Services
Total CPI Average
Earnings*
Source: ONS, *Average Earnings as of March 2013

34. Slide 34
Some well known casualties from the downturn

35. Slide 35
Strong input cost inflation coupled with output price
deflation means the profitability squeeze continues
NI Private Sector Profit Squeeze
3 Month Moving Average
30
40
50
60
70
80
Apr-04 Oct-05 Apr-07 Oct-08 Apr-10 Oct-11 Apr-13
Output Prices Input Prices No Change
InflationDeflation
Source: Markit Economics & Ulster Bank NI PMI
Profits
squeeze
Price of goods &
services falling

36. Slide 36Slide 36
Ben Bernanke (US Fed)
Mario Draghi (ECB)
Mark Carney (BoE)
Haruhiko Kuroda (BoJ)
Sterling weakness has hit consumer & businesses

37. Slide 37
‘Currency Wars’ partly explains NI’s sales & export
performance…
NI Sales & Exports 2011/12
relative to 2007/08 export peak*
-40%
-30%
-20%
-10%
0%
10%
20%
RoI
Exports
All
Exports
Rest of
EU
NI Rest of
World
All Sales External
sales
GB Sales
Due largely to Food &
Drink & Large Companies
Source: DFP, % Changes based on figures in constant prices. *Total Manufacturing Sales peak was 2008/09

38. Slide 38
Overall exports to the RoI down 30% but FDT up 40%?
NI Food, Drink & Tobacco Sales & Exports 2011/12
relative to 2007/08 peak
40 %
-60%
-45%
-30%
-15%
0%
15%
30%
45%
60%
Rest of
World
Rest of
EU
Exports
Exports External
Sales
Total
Sales
GB Sales NI Sales RoI
Exports
Source: DFP, figures are in constant prices

39. Slide 39
Outside of Food & Drink, NI faces a lack of demand
NI Manufacturing (Non-FDT) Sales & Exports
2011/12 relative to 2007/08 peak
-70%
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
RoI
Exports
NI Sales Exports Total
Sales
External
Sales
Rest of
EU
Exports
Rest of
World
GB Sales
Source: DFP Manufacturing Sales & Exports Survey, figures are in constant prices

40. Slide 40
Labour Market
Challenge 2

41. Slide 41
No recovery in construction sector so far
Northern Ireland Employment
(Employee Jobs)
-40%
-30%
-20%
-10%
0%
10%
All Sectors Services Manufacturing Construction
Peak to Trough Recovery from Trough Q4 2012 Relative to Peak
Source: DFP, QES

42. Slide 42
NI can expect a 1980s‐style employment recovery
NI Employee Jobs Recessions / Recoveries
Pre-Recession Peaks Indexed = 100
1980s
10yrs after downturn
employment returns to peak
1990s
10yrs after peak
employment rose by 19%
80
85
90
95
100
105
110
115
120
125
Peak 1 year 2yrs 3yrs 4yrs 5yrs 6yrs 7yrs 8yrs 9yrs 10yrs
Time Since Pre-Recession Peak
Index
1980s 1990s 2008-2012
Employment troughed (-7.5%)13 quarters
after 1979 Q4 peak & was 6.9% below peak
after 18 quarters
2008-2012
15 quarters of decline before job losses
levelling off. 18 quarters after 2008 Q2 peak
NI jobs have fallen by 5.4% as of Q4 2012 Q2
In 1990 UK recession, NI employment
fell slightly & troughed 2 years after the
pre-recession peak
Source: DFP & UB Calculations

43. Slide 43
Fiscal
Challenge
Challenge 3

44. Slide 44Slide 44
‘The deficit is coming down’??????
UK Public Sector Net Borrowing (PSNB)
Excluding Royal Mail & Asset Purchase Facility Transfers
+5bn
+32bn +60bn
+71bn
+46bn
+76bn
+42bn
0
20
40
60
80
100
120
140
160
2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18
£bn
June 2010 Forecast March 2013 Forecast (excluding Transfers)
Source:OBR
£332bn extra borrowing required relative to June 2010
forecast required over 7 years would fund the NHS for 2.5

45. Slide 45Slide 45
Paying off debt mountain = higher taxes & spending cuts
UK Public Sector Net Debt
0
250
500
750
1000
1250
1500
1750
2000
2001-02 2003-04 2005-06 2007-08 2009-10 2011-12 2013-14 2015-16 2017-18
£Bn
Source: ONS, OBR March 2013
One Trillion Pounds of Debt
1.5 Trillion Pounds of Debt

46. Slide 46Slide 46
12‐yr public spending feast followed by 7‐year famine
UK Public Spending Growth in Real Terms
(excluding Debt Interest & Social Security)
-10%
-5%
0%
5%
10%
15%
1951-52 1962-63 1973-74 1984-85 1995-96 2006-07 2017-18
Y/Y
Source: IFS February 2013
We are here
18.6% cut in 7yrs @60% of
Departmental cuts have been made

47. Slide 47
Decade ahead will HURT
Downside risks to NI growth (EZ crisis & Credit Crunch 2)
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
Fiscal austerity in NI – To be continued….

48. Slide 48Slide 48
Economic Growth will be an uphill challenge…
Source:
The Economist
?

49. Slide 49Slide 49
…with a ‘spreadsheet recovery’
Source:
The Economist
Computer says Yes. But consumer says No!

50. Slide 50
“Three, two, one…You’re back in the room”

51. Slide 51Slide 51
Reasons to be cheerful!
Far-off fields (e.g. BRICs & Emerging markets) are greener ……..so diversify export
base
NI’s private sector employee jobs increased by 2,000 in 2012
NI’s Pharmaceuticals output is currently at a record high
Global demand for food & pharmaceuticals to rise well into the future
NI’s public expenditure cuts are do-able……. spare a thought for the South
Recent FDI into NI & expansion of indigenous firms: e.g. Allstate, Wrightbus
2012 was a record year for the tourism industry
City of Culture / World Fire & Police Games 2013, G-8, All-Ireland Fleadh
ICT / software sector is booming
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

52. Slide 52Slide 52
Not all decades have been lost! Look at Laganside!
Laganside 1994 Source: Invest NI

53. Slide 53Slide 53
Laganside today
Source: Invest NI
Titanic QuarterTitanic Quarter

54. Slide 54Slide 54
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