End of an era Tougher times – but for how long?

1. End of an era Tougher times – but for how long? Neil Gibson: Oxford Economics 10th September 2008

2. Synopsis • The slowdown – what went wrong? • The Northern Ireland perspective • Could it get worse or will the good times return • What now? – strategies in a downturn

3. What went wrong? House prices The credit crunch Inflation Confidence

4. House Prices – clearly overvalued House price to income ratio 1998 - 2018

5. Surpassing even the 1990’s

6. Lending practices in question • Previously banks have lent more by increasing either: • The loan to value • The loan to income • At the peak of this cycle they increased both!! • Actually NI not as bad on loan to value

7. Bank shares have suffered

8. Was the crunch always going to bite? • Answer – Yes! • Levels of borrowing unsustainable • ‘Fundamentals’ breaking • Looking back lending practices hard to understand (Northern Rock, Fannie / Mac) • The price of imports was becoming unrealistically cheap - £5 jeans and 5p beans had to end! • The standards of living rises well ‘above trend’

9. Inflation – the knock out punch – but good news ahead?

10. Oil prices – a rollercoaster year

11. Food and energy prices painful

12. Potential for imported inflation

13. Confidence on the floor

14. Everyone finding it tougher World GDP growth

15. The Northern Ireland perspective

16. Recent record impressive Employment growth 1997-2007 Employment growth 1971-2007

17. Wealth creation has become priority number 1 (should it be?) Relative NI economic performance 1994-2007

18. NI wages relative to UK Relative wages by sector (UK=100)

19. House prices – needs no explanation! Relative house prices and house price / income ratios, 2007 House price forecast 1991-2018

20. Will incomes be squeezed? House price / car ownership correlation, 2003-2005

21. Could it get worse? – or will good times return?

22. The outlook is much less favourable in job terms Employment growth 2007-2017 Employment growth 2007-2017

23. Construction already in difficulties Construction employment and housing starts 2000Q1 – 2008Q1 Construction index 2000Q1-2008Q1 (2000 = 100) • Official employee data shows a fall in the last quarter, but only by 230 people, Q2 will be interesting

24. Retailing will follow –other sectors? Real disposable income per retailing employee (£000 per worker), 2007

25. Squeeze on incomes (particularly the least wealthy) severe Lowest incomes Highest incomes

26. Many places extremely exposed House price / income ratio 2007

27. ‘Fundamental’ house price still someway off House price required to normalise house price / income ratios to 5 and 7

28. Time to give the Beamer back? Change in high marquee car ownership 2003-2005 and car ownership relative to income

29. Export base crucial Employee jobs change, total and exporting sectors, 1997-2007

30. What chance a worse outcome? 2009

31. Any good news? - unemployment Claimant unemployment last ten years and latest monthly data

32. Public sector a buffer? Employees in public services as % of population of total employment, 2007 • Subvention a useful ‘export’

33. It is a better economy than 10 years ago! • Population has risen by 87,900 • Employment has increased by 131,200 • Unemployment down by 39,000 • Annual GVA higher by £6322m • Average weekly wage 12% higher than in 1998 • Overall average house price increased by 295% in last 10 years • 33% more people owning BMW, Mercedes, Audi and 9 other high marquee cars over two year period

34. What now – strategies in a downturn

35. Shifting balance? Economic Growth Economic Growth Government Consumer Business Government Business Consumer

36. Realities of the situation • No return to last decade (not to say fast growth may not return – but not fuelled in same way) • The situation could get worse (crucial time) • Legacy of last decade – financial profligacy and consumer decadence • Big problems ahead – low incomes, pensions etc. • Assembly in charge at a very very tough time But.. • Strong skills help • Population should drive demand for housing • Low turnover • Public subsidies • Stability and a global realisation put economy on better footing • Not alone in the problem so active solution seeking going on

37. What can be done? • Assembly – limited powers but important to send messages and to think ahead and contingence plan • Importance of public works as provide a boost to many sectors • Care over land-banking and ‘tycoon’ emergence • Keep long term strategic focus (skills training etc.) • Certain industries will need to shift priorities (what works in cost sensitive environment?) • Adjustment in expected incomes etc. required (cutting prices) • Moving focus – renovations, conversions, extensions, cost saving measures – not new building • Good time to get quotes for skilled tradesmen! • Think creatively – graduate purchase schemes? Renewable energy initiatives, public transport schemes • Care over focus – helping those hurt most? A sensitive issue – developers, low incomes, non-working?

38. Where do our concerns lie? • Making work pay – low income vs. non-working • Learning lessons – how painful should we let it become? • Rural economies – where now for jobs • The long run – loss of capacity? • The psychological impacts – painful and long lasting • The assembly visible? Effective? Under pressure?

39. Contact Details:Neil GibsonDirector: Regional servicesngibson@oxfordeconomics.com0844 979 2356