Northern Ireland – recession and its legacy NI Young Solicitors Association 13 th November 2009

1. Northern Ireland – recession and its legacy NI Young Solicitors Association 13th November 2009 Alan Bridle Head of Economics & Research

2. Contents Contents • The Global Recession - cause and effect • The Local Recession – impact and legacy • The Emerging “New financial order” • Summary

3. Cause & Effect Hubris Greed Excess Profligacy Rampant Consumerism Over- indulgence Short-term Shareholder value Share Prices & Property values collapse Global Recession Business Failures Complete Mistrust Semi & Full nationalisations of banks/ building societies Rising Unemployment Public Borrowing levels soar Avarice Fear

4. Context - The Big Picture Not just a common or garden cyclical downturn ! In our lifetimes – an unprecedented confluence of economic & Financial circumstances • A Financial Crisis squeezing credit • A Property Slump - “UK land values to contract by 70%” (Capital Economics) • An adjustment in household, corporate and national balance sheets • Risk of a prolonged global recession • On this occasion – a Banking Crisis preceding an Economic Crisis

5. The Fallout from Previous Financial Crises – Duration ? Source: Deloitte Economic Review Q4 2008

6. Portents of Economic Recovery? Optimism/ Over-Optimism ? Source: Reuters

7. Libor Premium over Base has Reverted to Norm 15th Sept 08Lehman Brothers in largest US bankruptcy, Merrill Lynch taken over by Bank of America 14th Sept 07 Northern Rock seeks emergency financial support from BoE sparking a run on the bank’s deposits by worried savers Jun 07 Two Bear Stearns hedge funds suffer after bad debts on US subprime mortgage related securities 13th July 08 US Treasury & Federal Reserve effectively nationalise mortgage finance companies Fannie Mae & Freddie Mac Source: BBA

8. The Depth of the Private Sector Recession in Northern Ireland The Depth of the Private Sector recession in NI (Contribution to GVA %) (8.5%) (15.5%) (45%) (5%) * All y/y Q2 2009 except Construction y/y Q1 2009 Source: ONS, DETI, DFP, BOI Estimates

9. Business Services & Finance continues to fall A “white collar” recession this time as well Index 2005= 100 Source: DETI

10. Number of NI Transactions vs NI House Prices Q4 02- Q2 09 A necessary condition for a recovery – stabilisation in residential property Source: BOI HPI

11. NI Housing – Supply/ Demand Dynamics New Dwellings Completed Projected Need (HGI RDS 1998-2015) 25 yr Average Sources:NI Housing Statistics & NI Regional Development Strategy

12. The Labour Market – NI employment rate is falling International Comparisons of ILO Employment Source: Labour Market Report September 2009

13. The burden of pain so far Falling employment & rising inactivity Source: QES, DETINI

14. A breakdown of inactivity Economically Inactive of Working Age in NI Source: Labour Market Report September 2009

15. The Regional Challenge The Regional Challenge • Domestic Rebalancing • From public to private • within private- lower exposure to construction and • domestic services • much greater propensity to export • less consumer-driven/ more investment-driven • UK Fiscal Consolidation • Hangover from banking crisis/ recession • “Two Parliaments of Pain” • Real cuts in Public Expenditure • International Recovery • Some encouraging signs • emerging • Different Speeds • Market Sentiment more positive • Regional Outlook • Recession ending but.. • Short & Medium term Growth Challenge • ‘Structural’ unemployment & Economic Inactivity • Period of sub-trend growth • Competitiveness Challenge • Private sector sustaining ‘cost savings’ wages and property • Public Sector reform- delivering more with less • ROI engineering a real devaluation • Banking Stabilisation • UK & Irish “solutions” • Continued near-term cyclical risks • Improving liquidity

16. The Regional Challenge The Regional Challenge Challenge - The new Fiscal Dispensation post April 11- one scenario Challenge- An already stretched regional balance sheet in an era of de-leveraging UK Plans Potential Regional Impact Financial Group Subvention “Donor- Dependency” Fiscal Deficit Claimant unemployment returns to 10 year peaksStructural vs cyclical? Public Sector Financial Sector • Deteriorating UK public finances represents • a major challenge to NI, particularly post • April 11 with probable “real” cuts in spending • Both the public sector and financial sector • must become more self-financing • Unemployment to rise beyond 60,000 and • real risks of a “jobless recovery” • Rising levels of inactivity, particularly • among 18-30 year olds.

17. Household confidence in NI has passed its low point After months of steady decline, NI personal financial and general economic optimism increased significantly in Q2 2009 NI Elections & Devolution of Power (March 07) US Slowdown, falling IT Shares NI Assembly Suspended Housing market slowdown Global credit crisis, increased prices for food. Fuel etc September 11th Gulf War II Source: Ipsos MORI

18. Forecast - Modest Growth to Resume in 2010 Source: BOI

19. The Banking Legacy …. There is a “New” Financial Order !

20. The Lending boom is over - UK Banks Asset growth

21. The painful closing of the funding gap

22. For first timesince series began in 1997 net lending in the UK fell across all the main sectors of the economy For first time since series began in 1997 net lending in the UK fell across all the main sectors of the economySectoral Breakdown of net lending flows Source: BOE

23. Banking – chastened and back to basics ! Money In Money Out Mortgage Borrowers Credit Card Borrowers Deposits Personal loans & Overdrafts SME Loans Loans & Lines of Credit to large Orgs Wholesale Funding Acquisition Finance Treasury Operations Proprietary Trading & Equity Investments Capital

24. HigherLending Margins insufficient to offset higher funding costs Higher Lending Margins insufficient to offset higher funding costs Ireland Ireland Irish Market Deposit Margins Irish Corporate & Mortgage Lending Spreads UK UK UK Term Deposit spread below reference rates UK Lending Spread above Reference rates

25. To Summarise… Global Recession (“technical”) is probably over, economies emerging at different speeds but the hangover will be protracted UK • A huge policy stimulus but debt overhang- delicate policy judgements ahead • Not necessarily the end of quarters of negative growth • Headwinds – VAT, car scrappage scheme, reversal of QE? NI • Private sector recession ends…public sector recession starts? • Return to growth but risk of a “jobless recovery” • Growth “drivers” need to change – exports & investment Banking Sector • Short-term cyclical risks • Continued period of convalescence • Higher costs for both loans and deposits but encouraging signs on liquidity Business Sector • Opportunities as demand stabilises & picks up slowly • Embed cost savings during recession • Best positioned for growth? Where are the opportunities in the next 5 years? A SLOW & GRADUAL RECOVERY IS MORE PREFERABLE TO A RAPID BOUNCE IS THIS PERIOD “THE SOLUTION” OR “THE PROBLEM” ?

26. Thank You Alan Bridle Head of Economics & Research Bank of Ireland Business Banking UK alan.bridle@boini.com