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Northern Ireland – recession and its legacy NI Young Solicitors Association 13 th November 2009 Alan Bridle Head of Economics & Research Contents Contents The Global Recession - cause and effect The Local Recession – impact and legacy The Emerging “New financial order” Summary

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slide1

Northern Ireland – recession and its legacy

NI Young Solicitors Association

13th November 2009

Alan Bridle

Head of Economics & Research

contents
Contents

Contents

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

context the big picture
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
the fallout from previous financial crises duration
The Fallout from Previous Financial Crises – Duration ?

Source: Deloitte Economic Review Q4 2008

portents of economic recovery
Portents of Economic Recovery?

Optimism/ Over-Optimism ?

Source: Reuters

slide7

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

the depth of the private sector recession in northern ireland
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

business services finance continues to fall
Business Services & Finance continues to fall

A “white collar” recession this time as well

Index 2005= 100

Source: DETI

number of ni transactions vs ni house prices q4 02 q2 09
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

ni housing supply demand dynamics
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

slide15

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
the regional challenge
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.
slide17

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

slide19
The Banking Legacy ….

There is a “New” Financial Order !

slide22

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

banking chastened and back to basics
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

higher lending margins insufficient to offset higher funding costs

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

to summarise
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” ?

slide26
Thank You

Alan Bridle

Head of Economics & Research

Bank of Ireland Business Banking UK

alan.bridle@boini.com