Ernst & Young Economic Eye - Summer forecast 2013

Ernst & Young

Economic Eye Summer forecast 2013

In conjunction with

Oxford Economics

About Ernst & Young Economic Eye For brief technical notes on the Ernst & Young Economic Eye forecasting model and previous reports, please refer to earlier Ernst & Young Economic Eye publications on www.ey.com/ie. Forecasts are directly linked to, subject to timing consistency, the Ernst & Young UK ITEM Club and the Ernst & Young Eurozone forecasts. For the Economic Eye – summer 2013 forecast, the ROI forecasts are based on an update of the Eurozone March 2013 forecasts. The NI forecasts are based on the UK ITEM Club spring 2013 forecasts. Published May 2013.

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Ernst & Young Economic Eye Summer Forecast May 2013 - November 2013

Contents Executive summary................................................................................. 1 Strong recovery proving elusive......................................................................................................................... 1 Good news more evident.................................................................................................................................... 1 Significant risks remain..................................................................................................................................... 1 What is needed for recovery?............................................................................................................................. 2

Strong recovery proving elusive despite some recent good news............... 3 1.1 1.2 1.3 1.4 1.5

ROI economy exceeded expectation in 2012, but Island growth to remain subdued in 2013....................... 3 Global developments impact on Island outlook......................................................................................... 4 ROI continuing to meet bailout programme targets and reform, while NI forced to wait longer on corporation tax decision..................................................................................... 6 Export growth slowing in 2012 and 2013 but signs of domestic demand weakness easing......................... 7 Understanding export performance....................................................................................................... 10

Can consumers play their part in the recovery?..................................... 15 2.1 2.2 2.3 2.4 2.5

Is the labour market finally stabilising?................................................................................................. 15 Contrasting cost of living pressures....................................................................................................... 17 Where are jobs being created today and tomorrow?............................................................................... 17 Aftermath of the housing market crash ................................................................................................ 19 Island population almost 100,000 higher than previously recorded ........................................................ 21

Risk assessment.................................................................................... 23 3.1 ROI Risk assessment................................................................................................................................. 23 3.2 NI Risk assessment.................................................................................................................................... 24

Summary............................................................................................... 25 Annex.................................................................................................... 27


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Executive summary Strong recovery proving elusive

Significant risks remain

The summer 2013 Economic Eye forecasts economic growth of 0.7% for the Island of Ireland in 2013, with growth of 0.8% for the Republic of Ireland (ROI) and 0.2% for Northern Ireland (NI). This is modestly weaker than the winter 2012 outlook, with growth downgrades in key export markets – Eurozone, UK and US - an important factor. It follows similarly sluggish, albeit higher than expected, growth of 0.6% for the All-Island economy in 2012.

Despite the recent good news, significant risks remain for both ROI and NI, which, if they materialise, would undermine economic performance. For ROI, downside risks include: the lack of bank progress in dealing with non-performing loans with spill-over effects on lending; the introduction of a tougher personal bankruptcy law which may affect consumer spending and increase home repossessions; and failure to reach an agreement with the public sector on Croke Park II.

Good news more evident Nevertheless, there is still plenty of good news to report from the last six months, with economic conditions across the island much improved since the trough of the recession. The ROI economy has registered two successive calendar years of positive GDP growth; domestic demand is starting its long road to recovery; the labour market is stabilising; deficit reduction is ahead of target; and the Government has already successfully returned to financial markets to borrow. Together these point to ROI having a smooth exit from its bailout programme, which would make it the first Eurozone country to do so. The Economic Eye accurately asserted some time back that 'Ireland is not Greece', a view which these recent positive economic data and the prospect of a successful bailout exit would vindicate. The UK economy avoided a triple-dip recession with stronger than expected growth in 2013 Q1, while its labour market continues to show significant net job creation. In fact UK employment performance has been so robust that with more normal productivity growth, it implies that the UK economy may be performing stronger than official GDP data indicates. In contrast, good news is harder to find for NI at the overall macro level. The labour market has not yet stabilised and the decision on devolving Corporation Tax powers has been postponed until autumn 2014, after the Scottish independence referendum. A key message from the summer 2013 Economic Eye report is how, looking to the future, the NI economy risks being left behind by a leaner, more competitive ROI economy. ROI has a significantly more developed private sector export base, a more flexible and skilled labour force, much greater linkages and connectivity to the global economy, and has underwent more painful but in the long-run beneficial economic structural reforms. That said, at the time of the launch of the summer 2013 Economic Eye report, there has been some encouraging news for the NI economy in the form of job announcements in the IT and food processing sectors.

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NI’s specific downside risks include: potential further housing market difficulties as interest-only mortgage arrangements expire, representing 40% of total mortgages; a strengthening of £ Sterling versus the euro, hurting exports to ROI and the Eurozone; and delayed austerity, with the most severe UK spending cuts potentially yet to come. As in previous Economic Eye reports, the summer 2013 report once again sets out in chapter three the top 10 downside economic risks for the two economies and whether the scale of the risk has increased, decreased or remained the same since the winter 2012 report. This is to assist businesses in tracking and planning their risk strategy.

What is needed for recovery? With a strong recovery proving elusive and notable downside risks persisting, this raises the question of what is needed for a more robust recovery of the All-Island economy. Exports to existing and new, fast growing markets clearly matter, and given their policy importance, NI statisticians need to produce more timely export statistics to better monitor trade. But as recent economic performance shows, export growth alone is insufficient for full recovery in both output, and even more so, employment. Policy makers also need to look at how to stimulate the other elements of business demand from consumers, government and investment, without neglecting the potential role of import substitution. So this means asking how consumers, business and government can all best play a role in the recovery. Chapter two looks closely at the role of consumers and their capacity to assist economic recovery, examining the factors which drive overall consumer spending: the labour market, cost of living, the housing market and demographics. Generally, these factors are moving in the right direction so that consumers can soon start to stimulate rather than inhibit growth, but there will continue to be bumps ahead. For investment, addressing structural problems in banking and property are essential long-term measures, although in the short-term tackling these problems could actually constrain lending and investment further. Overall, public investment could and should play an important role in sustaining overall investment levels. In setting levels of government spending, ROI, like many other countries, must decide whether to continue on the same tough austerity path; or ease off and exploit the fiscal space created by the restructuring of promissory notes and a reprofiling of official loans with the EU. But the question is not only whether to spend the estimated ‘available’ €1bn in the next budget that would still allow deficit reduction to remain on track. There is also the question of what competing spending areas should additional fiscal resources be spent on – public sector pay, capital projects, social sectors, etc., - and having in place ready-to-go spending programmes. Whilst recognising the sacrifices made to date by public sector workers in ROI, any decision on directing additional resources to public sector workers to secure agreement on Croke Park II, needs to be balanced against providing a stimulus to struggling sectors such as construction via capital projects.

For NI, it has been largely sheltered from the same degree of austerity faced in ROI. Without the pressure from markets and the Troika, and the same need to balance its books, NI economic policy has largely been ‘business as usual’ since the recession, despite the drastic change in economic conditions. However, even though it has been painful, the economic crisis has strengthened the capacity of ROI’s economic governance and forced it to question more rigorously public spending choices, seek better value for money and improve prioritisation. NI has had the opportunity in recent years to look at similar options and take its time, without the same urgency and external pressure. But from the outside it appears that this opportunity has not been exploited. Corporation Tax aside, rather than developing innovative ideas to stimulate growth or devising solutions to its economic problems, NI’s policy contribution has tended to focus on arguing against Westminster policies such as austerity and welfare reform, rather than suggesting an alternative. A vital and pressing decision for the Executive is what to do in economy policy terms between now and autumn 2014 when a decision on Corporation Tax is expected. The Executive may come up with complementary and reinforcing policies to maximise the benefit of a lower Corporation Tax rate, or alternatively come up with a plan B for the economy if the decision on Corporation Tax is unfavourable. Sitting and waiting should not be an option. Without a reduction in the rate of Corporation Tax or compelling plan B, there is little to suggest from NI’s current economic base and appetite to date for real structural economic reform, that the NI economy can out-perform the UK economy, ride the crest of waves of new growth sectors to the same extent as ROI, and be much better than a '2% annual growth' economy. While the Executive is pushing hard on inward investment and making notable sectoral gains in sectors such as IT and film, which are to be commended, the scale of these gains need to be significantly larger and spread across more sectors to address NI’s numerous economic challenges and close the gap with the UK and ROI economies.


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Chapter 1 Strong recovery proving elusive despite some recent good news 1.1 ROI economy exceeded expectation in 2012, but Island growth to remain subdued in 2013 The summer 2013 Economic Eye forecasts All-Island GDP growth of 0.7% for 2013. The ROI economy is forecast to grow by 0.8%, faster than the NI economy with growth of 0.2%. The UK economy is forecast to grow by 0.6%. The ROI and NI forecasts are modestly weaker than six months ago, while the UK ITEM forecast has been downgraded more significantly. Forecast growth of 0.7% in 2013 follows sluggish growth of 0.6% in 2012, underscoring how a strong recovery is still proving elusive. Although it is worth noting that the ROI GDP growth out turn of 0.9% in 2012 exceeded expectations – the winter 2012 Economic Eye forecast predicted 0.0% growth. This means that the ROI economy has registered two successive calendar years of positive GDP growth, a substantially stronger performance than the 5.5% contraction in 2009. Strong labour market data also suggests that recent UK growth may be higher than indicated by official GDP data. In contrast, NI’s GVA growth in 2010 and 2011 is surprisingly strong given job losses over the same period. According to ONS regional accounts data, manufacturing was a significant source of this growth in 2010 for NI; sector detail is not yet available for 2011. It is somewhat surprising that there has been little questioning of NI’s recent GVA data, when the equivalent data is so heavily scrutinised in ROI, UK and other economies.

Table 1.1

ROI, NI and UK economic growth outturn and forecast (% annual growth) ROI (GDP)

NI (GVA)

UK (GDP)

All-Island

2008

-2.1

-1.5

-1.0

-2.0

2009

-5.5

-4.1

-4.0

-5.2

2010

-0.8

2.0

1.8

-0.2

2011

1.4

1.6

1.0

1.5

2012

0.9

-0.8

0.3

0.6

2013

0.8

0.2

0.6

0.7

2014

2.2

1.7

1.9

2.1

2015

2.6

2.2

2.5

2.5

2016-2020 avg

3.7

2.5

2.6

3.5

Source: CSO, ONS, Ernst & Young Economic Eye

Note: All-Island economic growth based on ROI GDP and NI GVA

Whereas economic growth in NI and the UK has overtaken ROI growth, or contracted by less, since the recession began, the tide is now turning with 2012 the first year of faster ROI growth than in both NI and the UK. It is now NI, rather than ROI, that is acting as a drag on all-island economic performance, in terms of both output and employment (see chapter two). With growth remaining sluggish in 2013, it will not be until 2014 before all-island economic recovery gathers momentum, when growth is forecast to be 2.1%. The summer 2013 Economic Eye report continues to forecast faster economic growth for ROI over NI during the next decade for the same reasons as previous reports – namely its largely, more dynamic, export-orientated multinational business base, more enviable sector mix and stronger skills supply. The fact that ROI may only have a couple of more years of austerity, while NI is yet to face potentially its most severe period of austerity, is another important explanatory factor in their divergent growth forecasts. A key issue for long-term growth in NI remains the decision on devolving Corporation Tax powers. However this decision has been postponed until autumn 2014, after the Scottish independence referendum Significant risks remain for both ROI and NI around the central baseline outlook, which, if they materialise, would undermine economic performance. Chapter three sets out the top 10 downside economic risks for the two economies and whether the scale of the risk has increased, decreased or remained the same since the winter 2012 report.

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1.2

Global developments impact on Island outlook

One of the key factors behind the modest downgrade to the all-island growth outlook in 2013 is a wider downgrade to growth prospects in key export markets – the UK, US and the Eurozone. The Eurozone economy is forecast to contract again in 2013 causing weaker export forecast for both ROI and NI in 2013. The outlook would be even weaker were it not for the relatively strong performance of the US economy, which is forecast to grow by 2.2% in 2013. UK GDP growth in 2014 has also been revised down by 0.4 percentage points, which will impact NI more given its closer trade and public finance linkages. Table 1.2

Key trading partner GDP forecast (% annual growth) UK

US

Eurozone

2013

1.2

2.5

-0.1

2014

2.3

3.1

1.1

2013

0.7

2.2

-0.5

2014

1.9

3.0

1.0

2013

-0.6

-0.3

-0.4

2014

-0.4

-0.1

-0.1

Winter 2012

Summer 2013

pp* difference

Source: ONS, Haver Analytics, Ernst & Young Economic Eye

*pp = percentage point

What risk the Cyprus bailout a blueprint for other banking crises? The banking crisis in Cyprus was triggered by the restructuring of and write-downs on Greek sovereign debt. Over time there had been a massive build-up of a lightly regulated offshorebanking sector that invested very heavily in Greek assets, notably sovereign bonds. Cyprus secured a deal with international lenders in March, heralding the latest bailout deal in the Eurozone. The ECB had reportedly threatened to cut off liquidity support to Cypriot banks unless the government agreed measures to raise the amount needed to recapitalise the country’s lenders and avoid a collapse of the financial sector. Following initial controversial plans to impose a tax on all depositors, including persons with deposits less than €100,000, the final deal involved: a loan package worth €10bn from the Troika in return for €13bn to be raised domestically, including depositors with over €100,000 in savings taking major losses, in some cases up to 40%. Capital controls were also put in place. The bailout deal reached with the Troika of official lenders is forecast to exact a very heavy toll on the Cypriot economy, with the impact even more severe than in Greece following its bailout. GDP in Cyprus is forecast to contract by over 10% in 2013 and by almost 8% in 2014. Naturally the nature of the Cyprus bailout has raised concern that consequences for depositors could become the blueprint for dealing with existing and new banking problems elsewhere, including in ROI. While ROI and Cyprus share some similarities, such as that both are small, open economies that allowed their banking sectors to grow far out of line with the size of their economies. However, there are important differences. There was always much more financial contagion risk with ROI’s banks through linkages to Eurozone banks, as compared to the high share of Russian depositors with Cyprus’ banks. In addition, at the time when ROI was forced to take action and guarantee deposits, the insolvency of the system was not realised. As such any future Cyprus-type deal for ROI depositors is unlikely, not least given the pain of austerity already endured from a remarkably acquiescent and pragmatic population.


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Chapter 1 US sequester impact An agreement at the start of 2013 – the American Taxpayer Relief Act – allowed the US to avoid a large automatic increase in taxes and postponed automatic spending cuts - known as 'the sequester' - until 1st March. The cuts are projected to total $1.2 trillion over nine years, split between defence and discretionary domestic spending. The original legislation was to provide an incentive for both political parties to arrive at a grand bargain on fiscal and tax reforms. However, in an increasingly polarised political environment, Republicans and Democrats have found it difficult to reach a compromise. In the full US sequester scenario, cuts would amount to over US$86bn during the rest of this fiscal year, and US$110bn a year in subsequent years. The central baseline scenario assumes that politicians agree to cut spending, but spread the implementation over the medium-term. US GDP growth would be lower by 0.7 percentage points in 2013, with a further 0.1 percentage point reduction in 2014. The US economy would not be thrown into a technical recession, but growth would slow substantially. The effects would not be limited to the US - the ROI economy would be more negatively affected than the UK economy, with GDP growth 0.5 percentage points and 0.3 percentage points lower than baseline growth respectively in 2013, reflecting the relatively more important trade and investment linkages between the US and ROI, and the impact on US multinationals located in ROI. It is, however, worth noting that US consumer spending has so far in 2013 been remarkably strong despite the automatic budget cuts and increased payroll taxes this year, although the cuts may take time to impact more widely.

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Fig 1.1

US sequester scenario – ROI and UK GDP growth difference from baseline pp difference from baseline*

0.3 0.2 ROI

0.1 0.0 -0.1

2013

2014

-0.2 -0.3 -0.4 -0.5 -0.6 Source: Ernst & Young Economic Eye

* annual real GDP growth

UK

2015

2016

2017

1.3 ROI continuing to meet bailout programme targets and reform, while NI forced to wait longer on corporation tax decision Over the last six months, there has been significant good news for the ROI economy, - but less for the NI economy. In addition to registering two successive calendar years of positive GDP growth, ROI is seeing domestic demand start its long road to recovery, the labour market is stabilising (see chapter three), deficit reduction is ahead of its bailout programme target, and the Government has already successfully returned to the financial markets to borrow. Long-term government borrowing rates are now lower than all other peripheral Eurozone economies. The restructuring of promissory notes and a reprofiling of official loans with the EU have also reduced short-term interest repayment obligations, creating fiscal space for less severe austerity measures. Table 1.3

Long-term government borrowing interest rates (Jan 2008, July 2012, May 2013) 10-year government bond yield (%) Jan-08

Jul-12

May-13

Greece

4.5

25.9

10.4

Portugal

4.4

10.1

5.5

Ireland

4.5

6.4

3.5

Spain

4.3

6.4

4.1

Italy

4.5

5.8

3.9

United Kingdom

4.5

1.7

1.7

Germany

4.2

1.5

1.3

Source: Haver Analytics

Against this backdrop, the Governments north and south face some crucial decisions. ROI, like many other countries, must decide whether to continue on the same tough austerity path; or ease off and exploit the fiscal space created by the more relaxed stance of the Troika potentially towards austerity and reduced short-term interest obligations. In contrast to Greece, austerity measures in ROI have been largely accepted as necessary by an acquiescent and pragmatic population. But there is a limit to public acquiescence, evident in the rejection by labour unions of Croke Park II, in which the government proposed further cuts in public sector wages. The Government still has no agreement with the public service unions and the clock is ticking towards the beginning of July when, by its own calculations, it will have to begin implementing savings if its fiscal targets are to be met. If ROI takes up the opportunity to ease back on austerity, it will have tough choices in balancing the demands of unions with the needs of the wider economy, including struggling sectors such as construction that could otherwise benefit from an increase in capital spending. For NI, a key decision is what to do in terms of economy policy between now and autumn 2014 when a decision on Corporation Tax is expected. The options for the Executive are to come up with complementary and reinforcing policies to maximise the benefit of a lower Corporation Tax rate, or alternatively come up with a plan B for the economy, that would deliver a similar sizable impact, if the decision on Corporation Tax is unfavourable. In reality it would be prudent to pursue both options. Attracting events such as the G8 summit, including hosting a follow up investment conference, and winning the UK City of Culture for Derry~Londonderry, are all helpful short-term demand stimuli, but these alone will not have the same long-term impact as the difficult structural reform and public spending choices that ROI has made.

Together these all point to ROI achieving a smooth exit from its bailout programme, which would make it the first Eurozone country to do so. The Economic Eye accurately asserted some time back that 'Ireland is not Greece', which these recent positive indications and the prospect of a successful bailout exit would vindicate. That said, the IMF has warned about the lack of progress in tackling non-performing loans and its impact on bank profitability and lending. The UK economy avoided a triple-dip recession with stronger than expected growth in 2013 Q1, and significant net job creation. In fact UK employment performance is such that it suggests that the economy may be performing stronger than official GDP data indicates. In contrast, good news is harder to find for NI. The labour market has not yet stabilised (see chapter three) and the decision on devolving Corporation Tax powers has been postponed until autumn 2014, after the Scottish independence referendum.


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Chapter 1 1.4 Export growth slowing in 2012 and 2013 but signs of domestic demand weakness easing As mentioned above, downgrades to the growth outlook in key trading partners have led to weaker projections for all-island and UK export growth for 2013 in the latest summer 2013 Economic Eye forecast. In fact, this slowdown in exports had already been evident in the headline constant price data in 2012. In real terms, 2012 saw a sharp slowdown in ROI export growth, from 6.2% in 2010 and 5.0% in 2011, to 2.9% in 2012. During 2012, there were two quarters of falling real exports, following only one quarter of decline in the previous 11 quarters. The story is similar for the UK where real export growth has fallen from 6.4% in 2010 and 4.5% in 2011, to -0.2% in 2012, during which there were real declines in three of the four quarters. Table 1.4

ROI and UK export outturn (% quarterly growth) ROI

UK

2008 Q1

-1.8

1.7

2008 Q2

-0.8

1.4

2008 Q3

-0.8

-1.2

2008 Q4

-0.7

-3.5

2009 Q1

-1.6

-6.0

2009 Q2

-1.1

-1.0

2009 Q3

-0.8

1.4

2009 Q4

0.1

2.7

2010 Q1

3.2

-0.4

2010 Q2

2.4

4.0

2010 Q3

4.0

0.9

2010 Q4

-1.4

3.3

2011 Q1

1.5

1.3

2011 Q2

2.1

-1.8

2011 Q3

0.8

-0.2

2011 Q4

0.1

3.1

2012 Q1

2.1

-1.5

2012 Q2

-0.4

-1.1

2012 Q3

0.0

1.8

2012 Q4

0.5

-1.6

Source: CSO, ONS

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While the slowdown in export growth is disappointing, the ROI economy is becoming better equipped to weather weaker export performance. ROI’s trade balance has improved significantly, thanks in part to strong export performance, but also due to import growth lagging behind both export and even domestic demand growth in recent years. Multiple factors could explain the latter but improving international cost competitiveness and explicit or implicit import substitution measures have very likely played a role. Allied to an improving trade balance has been a slowdown in the pace of decline in domestic demand. Consumer spending fell by less than 1% in 2012, compared to a 5% fall in 2009, while investment recorded a surprise 1.1% rate of growth in 2012. Although further austerity is still built into the summer 2013 Economic Eye forecast, albeit with smaller declines in government consumption, and tackling non-performing loans and improving bank profitability may initially constrain lending and investment, progress is slowly being made to move the ROI economy away from its twin speed growth path of recent years. Within five years it is expected that net trade and domestic demand will make equal contributions to overall ROI GDP growth, by which time job creation will be much stronger. It is much more difficult to analyse NI’s recent export performance because of the fragmented nature of its trade data and time lags in releasing data. Given the policy importance attached to exports, NI statisticians need to produce more timely export statistics to better monitor trade. The latest service export data relates to 2010 and full year out-of-state tourism spending is only currently available for 2011. Manufacturing exports data is however available for 2011/12 and shows an annual rise, following two previous years of decline. This is somewhat surprising in that it is an opposite trend to ROI and UK where export growth had been robust before slowing.

Table 1.5

ROI economic growth outturn and forecast by expenditure component (% annual growth) Private consumption

Government consumption

Investment

Exports

Imports

GDP

2008

-0.1

0.6

-10.2

-1.1

-2.9

-2.1

2009

-5.4

-4.4

-27.5

-3.8

-9.7

-5.5

2010

1.0

-6.5

-22.6

6.2

3.6

-0.8

2011

-2.4

-4.3

-12.8

5.0

-0.3

1.4

2012

-0.9

-3.8

1.1

2.9

0.3

0.9

2013

-1.6

-2.7

-3.4

2.2

1.6

0.8

2014

0.0

-1.3

4.9

4.2

3.2

2.2

2015

0.6

-1.1

4.9

4.5

3.7

2.6

2016-2020 avg

2.3

0.6

5.4

4.4

3.6

3.7

Source: CSO, Ernst & Young Economic Eye

In contrast to ROI, there has been no real improvement in the UK’s trade balance. In fact it worsened in 2012. The twin speed growth pattern so evident in ROI has been far less a feature of recent UK economic performance. Despite stated Government policy, it is difficult to see the impact of austerity in national accounts government consumption figures. Strong import demand has prevented net trade contributing more to growth, while consumer spending has held up remarkably well, posting growth of 1.2% in 2012. Looking ahead, the UK recovery is predicated on consumers spending and corporates investing built-up cash reserves, but clearly there are downside risks to both.

NI does not have GDP by expenditure accounts to produce similar analysis. If the data were available, it would likely show similarities with both ROI - sluggish domestic demand as a result of labour and housing market difficulties, and the UK – less impressive net trade performance compared to ROI. Although domestic demand growth should not be as weak as ROI, and net trade possibly stronger than the UK due to some strong manufacturing outturn data.

Table 1.6

UK economic growth outturn and forecast by expenditure component (% annual growth) Private consumption


Investment

Exports

Imports

GDP

2008

-1.6

1.6

-4.6

1.2

-1.8

-1.0

2009

-3.1

0.8

-13.7

-8.2

-11.0

-4.0

2010

1.3

0.4

3.5

6.4

8.0

1.8

2011

-0.8

-0.3

-2.9

4.5

0.0

1.0

2012

1.2

2.2

1.5

-0.2

2.7

0.3

2013

1.2

0.4

1.2

0.6

1.4

0.6

2014

1.9

-0.5

7.0

4.4

4.6

1.9

2015

2.2

-0.6

7.9

5.9

5.4

2.5

2016-2020 avg

2.7

0.0

4.3

4.6

3.8

2.6

Source: ONS, Ernst & Young Economic Eye


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Chapter 1 Table 1.7

ROI recent export performance by key market and major good and service (annual change, €bn) 2011

2012

8.0

4.8

Exports (€bn, constant prices) * Total Goods

4.6

-6.3

Services

3.4

11.1

Total

8.7

9.5

Goods

1.5

0.7

Services

7.1

8.8

Other Europe

0.1

1.3

RoW

0.4

1.1

GB

0.2

1.0

Rest EU excluding UK

0.1

0.7

NI

0.1

0.0

US and Canada

0.6

-3.3

0.0

0.5

Exports (€bn, current prices) **

Goods exports by market (€bn, current prices) **

Goods exports by selected product (€bn, current prices) ** Essential oils, perfume materials, toilet preparations, etc. Petroleum, petroleum products and related materials

0.3

0.4

Miscellaneous manufactured articles, n.e.s.

-0.3

0.3

Commodities and transactions n.e.s.

-2.5

0.3

Telecommunications and sound recording, reproducing equipment

-0.1

0.3

Chemical materials and products, n.e.s.

0.1

0.2

Electrical machinery, appliances, etc., n.e.s.

0.1

-0.3

Medicinal and pharmaceutical products

2.4

-1.9

Computer services

3.9

4.7

Business services

0.6

2.6

Financial services

0.3

0.5

Insurance

0.2

0.5

Transport

0.5

0.4

Communications

0.1

0.1

Royalties and licences

1.4

0.1

Other services not elsewhere stated

0.0

0.0

Travel and tourism

0.2

-0.1

Service exports (€bn, current prices) **

Source: CSO

Note: * seasonally adjusted; ** not seasonally adjusted

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1.5

Understanding export performance

Given the importance of exports to growth in the recovery of the all-island economy, the summer 2013 Economic Eye report looks in detail at recent export performance north and south. The first interesting observation for ROI is that actual export performance in 2012 has perhaps not slowed down by as much as real growth figures would suggest. Nominal export growth in euro level terms has actually been stronger in 2012 compared to 2011, helped by a weaker euro versus the US dollar. While goods export growth did slow in 2012, with a notable large fall in sales to the US and Canada – this has been surprising because the weaker euro should have made exports to the US more competitive – service exports growth has continued to be very strong.

Computer service exports increased by €4.7bn in 2012, with financial, business and insurance service exports growing by a combined €3.6bn. There was a more mixed performance across merchandise good sectors, with a rise in cosmetic and petroleum exports, offset by a large fall in medicinal and pharmaceutical products. While some of these service export figures are impressive, these sectors do not necessarily create significant numbers of new jobs in ROI. Part of the value of exports may capture profits booked by multinational companies with ROI headquarters to take advantage of the low corporate tax rates. For example, for the additional €4.7bn in computer service exports, information and communication employment increased by at most 5,000 jobs, equivalent to almost €1m in export earnings per job, a phenomenal level of productivity by any standard.


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Chapter 1 Table 1.8

NI recent export performance by key market and major good and service (annual change, £ mn) 2009/10

2010/11

2011/12

Exports

-651

-183

181

Sales to GB

447

289

314

Total external sales

-204

106

495

ROI

-196

-261

39

Rest of EU

-493

154

160

38

-76

-18

Machinery and equipment n.e.c

-133

140

91

Computer, electronic and optical

-65

-50

78

Fabricated metal products

-60

-45

51

Other transport equipment

218

-65

38

Textiles

-14

-2

31

Pharmaceutical

34

-8

22

Wearing apparel

-2

9

21

Rubber and plastics

-84

53

7

Other manufacturing

-20

14

6

Chemicals and chemical products

32

5

3

Manufacturing external sales (£ mn, current prices)

Manufacturing exports by market (£ mn, current prices)

ROW Manufacturing exports by selected sector (£ mn, current prices)

Printing and reproduction of recorded media

-4

1

3

Motor vehicles and trailers

-41

10

2

-3

-23

1

-162

na

na

33

-38

-1

Furniture Repair and installation of equipment Food, beverages and tobacco Paper and paper products

0

-26

-8

Wood and products of wood and cork

-32

-25

-11

Non-metallic minerals

-55

2

-24

Electrical equipment

-117

-1

na

11


2010

2011

2012*

-104

-15

Other Europe

11

-19

ROW

16

-2

High export potential service exports (£mn, current prices) Computer and Related Activities

25

Research and Development

6

Advertising

2

Business and Management Consultancy Activities

-11

Architectural and Engineering Activities and Technical Testing and Analysis

-12

Out-of-state tourist visitor spending (£mn, current prices)* GB

Source: DETI, Northern Ireland Tourist Board

Note: 2012 tourist visitor spending is based on Jan-Sept 2011 vs. Jan-Sept 2012 na: some export data is not publically available due to disclosure issues *ROI tourism visitor spending is not split from other Europe as the data is not publically available

NI manufacturing export performance appears to have picked up in the latest year data is available for (2011/12), with growth recorded across all broad destination markets. Exports of machinery and equipment, computer, electronic and optical equipment, fabricated metal products and other transport equipment were the main sources of growth. A striking feature of service export growth is the small size of annual growth in NI compared to ROI. For example, computer and related activity service exports increased by £0.02bn in 2010 in NI, compared to growth of €4.7bn in ROI computer service exports in 2012. While Belfast is doing well attracting financial technology firms, the scale of catch up required to develop an ICT industry of comparable size to ROI is stark from this data. However it could also be that the type of activity NI is attracting – cost as opposed to profit centres – means the true value of export trade is not being officially measured. This reemphasises the need again for NI to improve significantly its statistical collection of trade data.

Provisional tourism data for the first nine months of 2012 versus the first nine months of 2011 suggests a disappointing performance. Total out-of-state nights and spend are down by 10% and 12% respectively (note ROI visitors not included in these figures yet). Excluding GB visitors, spend is down by 16%. The only market showing growth is from North America, with both the GB and other Europe markets particularly weak in 2012. This data however seems somewhat at odds with the much more positive hotel occupancy data, which will also include demand from domestic and ROI visitors. During January – December 2012, NI’s hotel room (65%) and bed-space (46%) occupancy rates increased by 7% and 5% respectively when compared to the previous year. Clearly some reconciliation between the two data sources will be required to present a consistent picture of tourism performance in 2012. Looking ahead, the Island economy needs to diversify its export markets to fully tap into the growth offered by emerging economies as current penetration of these markets, such as China, India and Brazil, is relatively small. That said, it is much easier to state this in policy documents than achieve in practice given issues such as intellectual property risks, trade barriers and intense cost competition. Trade with current dominant export markets in the Eurozone, GB and US will thus remain extremely important for the foreseeable future.


12

Chapter 1 The last section of this chapter examines exchange rate trends and outlooks given the impact changes in currency values can have on trade. Since the start of the global recession and eurozone crisis, ROI has benefited from a gradual and general weakening of the euro versus the US dollar. Back at the onset of the recession, the euro actually strengthened versus £ sterling, which at the time had a major and highly visible impact on cross-border retail trade. From a rate at close to parity at one stage, the euro has weakened against the £. Together with weaker inflation in ROI, this has helped to reduce cross-border retail trade, to the relief of many ROI border retailers. The summer 2013 Economic Eye outlook is for a gradual weakening of the euro versus both the dollar and £, which should help to boost ROI exports.

NI exporters were boosted during the early part of recession by a significant weakening of the £ versus both the dollar and euro. Since 2009, the £ has been relatively stable against the dollar and strengthened gradually against the euro. The outlook is for a modest weakening versus the dollar, as the US growth outlook is stronger than the UK outlook, and a modest strengthening versus the euro. In theory exporting to ROI and the Eurozone should become more challenging for NI firms and other markets where NI is competing against other Eurozone firms. Fig 1.3

Sterling exchange rate trend and forecast Sterling value (£) 2.20

Sterling weakening

Fig 1.2

Euro exchange rate trend and forecast 1.60

Euro weakening

1.60

Forecast

1.40

1.40

1.20

1.20

2013 Q1 exchange rate€1=$1.32

1.00

US$

2013 Q1 exchange rate €1=£0.85 UK£

2007

2009

2011

2013

2015

Source: Haver Analytics, Ernst & Young Economic Eye

13

1.00

US ($) 2013 Q1 exchange rate £1=€1.17

2005

2007

2009

Source: Haver Analytics, Ernst & Young Economic Eye

0.80

2005

2013 Q1 exchange rate £1=$1.55

1.80

Euro value (€)

0.60

Forecast

2.00


2011

Euro (€)

2013

2015


14

Chapter 2 Can consumers play their part in the recovery? 2.1

Is the labour market finally stabilising?

Employment is a critical factor in consumer spending, and there are encouraging signs here. Since the start of 2011, total net job losses have been limited to around 10,000, compared to 300,000 net job losses between the start of 2008 and start of 2011. Employment levels in ROI are stabilising, as is the rate of unemployment which, aided by net out migration, started to fall during 2012. This is a different picture to other peripheral economies where unemployment continues to rise to record rates. That said, the current labour market position is still very tough for many: employment is 15% below peak and is still not rising, and the unemployment rate is still a very high 14 to 15%. The UK labour market has been remarkably resilient since 2010, despite a sluggish recovery in GDP and fall back into a double-dip recession. Employment has been rising – almost ¾ million net new jobs have been created since the start of 2010 – getting employment back to its pre-recession peak very quickly, and oddly for recovery phases, even sooner than output. In fact the labour market is so strong and implied productivity so weak that there are valid questions about whether the pace of UK recovery is stronger than GDP data is suggesting. The opposite is true for NI. According to official GDP and employment data, UK productivity is still below its pre-recession peak, whereas it is 10% above for ROI. The UK’s unemployment rate has been gradually falling as a result of rising employment, and would have fallen further were it not for still high, albeit reduced, net migration inflows.

The NI labour market has been the weakest of the three jurisdictions. Employment levels have continued to fall with, as explained below, tentative signs of stabilisation only underpinned by part-time job creation. Both NI’s ILO and claimant unemployment rates continue to climb, as a result of both employment trends and the NI population having a less dynamic propensity to emigrate although this can also be explained by individuals being in negative equity and unable to sell their home and some of the unemployed being older with fewer transferable skills. Fig 2.1

ROI, NI and UK recent total employment trend and forecast Index * 2008 Q1=100 110

Forecast UK

105 100 95

NI

90

ROI

85 80 2008

2010

2012

2014

2016

2018

2020

2022

Source: CSO, ONS

Note: ROI based on seasonally adjusted total employment, NI and UK based on seasonally adjusted total workforce jobs * Employment index

Changes to aggregate productivity growth can also sometimes be explained by the nature of job creation, namely the sector mix and full versus part-time composition. A striking aspect of the recession and recovery across ROI, NI and the UK, is how part-time jobs have performed much more strongly than full-time jobs. This is brought about either by full-time jobs being reduced to part-time hours, or the majority of new jobs created being part-time only. This also has implications for consumer spending as on average, full-time jobs pay more.

15


In ROI, part-time employment has risen steadily since early 2008, growing by a fifth, compared to a net loss of one in five total full-time jobs. While the recession is a key driver here, part of the trend may also be a normalisation of employment patterns with the UK and NI. In ROI currently only one in five jobs are part-time compared to one in three for both NI and the UK. Full-time employment has stabilised in the last two years, with the original Croke Park deal helping to prevent large scale full-time job losses in the public sector. In NI, full-time employment is still falling, with the overall stabilisation in total employment in 2012 completely dependent on part-time job creation. The UK economy suffered a much smaller proportionate decline in full-time jobs. Since the start of 2011, there has been a gradual rise in both full-time and part-time jobs in the UK, highlighting once again the stronger position of the UK labour market. Fig 2.2

ROI, NI and UK recent full-time and part-time employment trend Index * 2008 Q1=100

ROI FT UK FT NI FT

130

NI is forecast to have the most sluggish jobs recovery, resulting in the unemployment rate continuing to rise before falling back only gradually over the next decade. Arguably welfare reform could push unemployment in NI higher still. Fig 2.3

ROI PT UK PT NI PT

ROI, NI and UK ILO unemployment rate outturn and forecast % labour force

125

16

120

Forecast

ROI PT

115

14

110

UK PT

105

NI PT

100

UK FT

95 90

ROI

12 10

NI FT

85 ROI FT

80 75 2008

In terms of outlooks, UK employment levels are forecast to continue rising, helping to bring down the UK’s unemployment rate further. ROI employment is forecast to remain flat in the near-term until the recovery properly takes hold and lending returns to normality. But thereafter ROI employment is forecast to pick up strongly, allowing the unemployment rate to fall relatively quickly, assuming there is net out migration still for much of the next decade. NI is forecast to have the most sluggish jobs recovery, resulting in the unemployment rate continuing to rise before falling back only gradually over the next decade. Arguably welfare reform could push unemployment in NI higher still. For ROI and NI to get unemployment rates back down to pre-recession levels by 2015 would require 150k and 32k more jobs respectively to be created between now and 2015 than currently forecast in the summer 2013 Economic Eye.

2009

2010

2011

2012

8 NI 6

Source: CSO, ONS

4

* Employment index

2 1990

Note: ROI based on seasonally adjusted employment, NI and UK based on seasonally adjusted workforce jobs

UK

1995

2000

2005

2010

2015

2020

Source: CSO, LFS, Ernst & Young Economic Eye


16

Chapter 2 2.2

Contrasting cost of living pressures

Inflation is a key determinant of living costs and hence disposable income and consumer spending. A notable trend during ROI’s recession and recovery has been how costs, both inflation and wage costs (which are themselves inter-linked), have been kept in check, helping to improve international cost competitiveness. No other Eurozone economy, the peripherals included, has come close to matching ROI’s control of costs in recent years. While deflation is arguably painful - ROI had negative annual inflation for 19 consecutive months in 2009 and 2010 - especially for businesses selling goods and services. However, it did provide a cushion for consumers coping with pay freezes or cuts, reduced working hours and redundancy. Even though inflation has risen since 2010 in ROI, and was above 2.0% in 2011 and early 2012, it has since fallen back to 0.5% in March 2013. In contrast UK inflation has consistently exceeded the Bank of England’s 2.0% target and despite easing, still remains high at 2.8% in March 2013, and above target. Region-specific inflation data does not exist for NI and while the weaker local economy may have put downward pressure on prices, it is unlikely that inflation in NI is significantly far below UK inflation. Thus consumers in NI have been cushioned much less from rising living costs.

2.3 Where are jobs being created today and tomorrow? Macroeconomists, including the Troika, tend to pay little attention to the labour market, and give even less attention to the sectoral trends underlying aggregate employment. Economic Eye has always closely examined sectoral employment and here the report looks at which sectors have been creating jobs between the start of 2010 and end of 2012 (the latest data available), and which sectors are forecast to create jobs over the next decade. The fastest growing employment sector in ROI over the last two years, in percentage terms, has been information and communications, followed by agriculture for which, however, employment data can be volatile. Other net job growth sectors have included administration and support services, health and social care and other services. Professional services employment has been flat, while distribution and retail employment is also starting to stabilise. Construction continues to experience the most severe net job losses, followed by public administration, accommodation and food services and transport. The wider industry sector, comprising manufacturing, mining and utilities, is also still losing jobs, but there is likely to be a very mixed performance across subsectors between those supplying the local economy and those exporting high value products.

17


The fastest growing employment sector in NI over the last two years has also been information and communications, followed by administration and support services and industry, all sectors receiving substantial Invest NI support. Like ROI, the construction sector continues to shed jobs faster than any other sector, with a number of high profile construction business closures making the headlines. In contrast to both ROI and NI, the UK labour market has created jobs across a wider spectrum of sectors, concentrated in services such as information and communications also, transport and storage, professional services, accommodation and food services (to which the Olympics provided a boost) and distribution and retail, and also industry. This is the sort of job creation the Island needs but the economy is not yet at this point in its recovery. Construction employment has also fallen in the UK, but by much less than in ROI or NI. Table 2.1

ROI, NI and UK recent sector employment performance (% growth, 2010 Q1-2012 Q4) ROI

NI

UK

Agriculture, forestry and fishing

9

3

-2

Industry

-6

3

2

Construction

-22

-19

-7

Services

-1

-1

3

Distribution and retail

-1

-1

5

Transport and storage

-4

-1

11

Accommodation and food services

-9

-2

7

Information and communications

10

12

11

Financial services and real estate activities

-3

-1

4

Professional, scientific and technical services

0

-2

8

Administration and support services

2

6

3

Public administration

-10

-7

-11

Education

-2

-2

-1

Health and social care

3

-2

3

Other services

3

1

-5

Total

-3

-1

3

Source: CSO, DETI, ONS

Industry = Manufacturing, Mining and Utilities ROI data based on seasonally adjusted people-based employment. NI and UK data based on seasonally adjusted workforce jobs

The sector employment trends in the table above are broadly consistent with sector output and sale trends across the three jurisdictions. Construction output in ROI has fallen by a staggering 80% from its peak in 2007, although declines have bottomed out since 2011 as there is only so far output can fall and some minimum activity level must remain. Construction output has fallen by almost half in NI and appears close to stabilising. Although construction activity has weakened in the UK in the last year, which has acted as a drag on GDP growth, it remains much closer to its pre-recession peak. Retail sales slumped in ROI during the worst of the recession and have been relatively stable for a sustained period, although job reductions have occurred with more of a lag. In contrast retail sales in the UK dipped temporarily in 2009 but have not looked back since, growing steadily year-on-year. Table 2.2

ROI, NI and UK sector employment forecast (% growth, 2012-2022) ROI

NI

UK


-8

2

-13

Industry

4

-5

-9

Construction

27

3

13

Services

16

4

10


11

3

11


11

11

14


10

5

10


21

25

15


24

3

10


33

21

26


34

18

19


-3

-12

-11

Education

-6

-4

-4


5

1

2

Other services

5

13

18

Total

10

3

8

Manufacturing output fell sharply in both NI and the UK during the downturn before steadily recovering over the ensuing three - four year period. ROI’s manufacturing sector displayed impressive resilience in 2009, helped by its mix of less cyclical products such as pharmaceuticals. However a large recent drop in output is a worry and is consistent with the reported industry net job losses. Looking ahead to the next decade, the summer 2013 Economic Eye predicts a return to net employment creation across the majority of sectors in ROI, including construction which will eventually have to recover. Service export sectors will lead ROI’s economic recovery, stimulating demand in secondary service sectors and offsetting further public sector job losses. NI’s future job creation will follow a similar sectoral pattern, but growth rates will be more muted as NI firms are less exportorientated and wider economy demand will be weaker. Greater dependence on the public sector will also act as a drag on overall employment growth. A key issue for both ROI and UK is the financial transaction tax (FTT). The UK is mounting a legal challenge against Europe's planned FTT. ROI is following the UK in not participating for fears of putting the IFSC at a competitive disadvantage to the City of London. The summer 2013 Economic Eye outlooks assumes the UK legal challenge will be successful, otherwise there would be a need to scale back the projected growth in financial services employment in both the UK and ROI.

Source: Ernst & Young Economic Eye

Industry = Manufacturing, Mining and Utilities ROI data based on people-based employment. NI and UK data based on job-based employment


18

Chapter 2 2.4

Aftermath of the housing market crash

Another key driver of consumer spending is the All-Island housing market. Set in a regional context, the all-island housing market crash has been spectacular. Depending on exact data sources, the specific house price variable used and the start and end time period, All-Island house prices have fallen by between a third and one half from their peak. In contrast house prices in Scotland (which operates a different legal and bidding system) and the Greater South East (where supply is more constrained and demand strong) are now higher than their pre-recession level. London house prices are almost 20% higher. Even in Wales or the north of England, the next worst performing regions, house prices are much closer to their pre-recession level according to DCLG.

ROI and UK regions recent house price trends (2008-2012) NI ROI Wales North East North West Yorkshire & Humber East Midlands South West West Midlands East South East UK Scotland London -30 -20 -10 0 % change in house price 2008-2012

10

20

Source: Department of the Environment, Community & Local Government, DCLG, Ernst & Young Economic Eye

* ROI data based on preowned housing UK & NI house based on mix-adjusted house prices

19

In NI, many home-owners, several of whom are in negative equity, now face the prospect of a rise in mortgage payments, as interestonly mortgage periods have expired. 40% of mortgages in NI are estimated to be interest-only. NAMA holds significant property assets across the Island and while it is careful not to be accused of a fire-sale of assets driving down prices further, it will have to offload assets over time which will put downward pressure on prices. In ROI, housing repossessions have been remarkably low, despite almost one in eight of the country's private residential mortgages being in arrears, and potentially more homeowners negotiated reduced interest-only repayments. The IMF has applied pressure on ROI’s banks to tackle non-performing loans, with the result that a new state insolvency service has been set up to try to broker deals between debtors and lenders. This could force those in mortgage trouble to give up their cars, private health insurance and holidays and feed their families on a maximum daily budget. The period of bankruptcy will also be reduced from at least 12 years to just three. The measures are part of an overhaul of Ireland's outdated bankruptcy laws.

Fig 2.4

-40

The better news is that house price falls across the Island are starting to bottom out, for now at least. While house prices can only fall for so long and by so much in normal circumstances, there are other unique circumstances on the Island which could spark further falls.


These factors, along with broader economic and demographic fundamentals, mean that compared to the strong UK house price outlook, house price growth across the Island is forecast to be very modest over the next decade with prices in NI in particular remaining far behind their peak. Many home-owners will thus face major negative equity issues for a considerable period of time. This weak outlook is even with the assumption that ECB and Bank of England interest rates remain at their historic low in the mediumterm. Indeed the ECB recently delivered a quarter-point cut in interest rates, the first cut in borrowing costs since July 2012, reducing interest rates to a record low of 0.5%.

Fig 2.5

ROI, NI and UK recent house price trend and forecast 2000=100 350 Forecast

NI

300

UK

250 200 150

ROI*

100 50 0 1990

1995

2000

2005

2010

2015

2020

A decade of moderate house price growth across the Island, on top of the falls to date, is the trajectory needed to continue to align house price levels with average household incomes, and ensure affordable housing. Modest growth is also a reflection of the overhang in supply, a relatively unique characteristic of the All-Island housing market, certainly relative to large parts of southern England. This is good news for new home-buyers (although they arguably face tough borrowing conditions), but less good news for property developers and existing home owners, especially those in negative equity. The exact opposite is true for the UK, and the Greater South East in particular where supply is more constrained. UK house prices are forecast to rise strongly, with the affordability ratio of house prices to earnings projected to remain above both the ROI and NI ratios, making home-ownership very expensive for young people, including well-paid young professionals. There could be a window of opportunity for the Island, at least its major cities, to attract young talent with more affordable housing.

Source: Department of the Environment, Community & Local Government, DCLG, Ernst & Young

Fig 2.7

Economic Eye

* ROI data based on preowned housing

ROI, NI and UK house price to wage ratio trend and forecast

UK & NI based on mix-adjusted house prices

Ratio of house prices to earnings

Fig 2.6

ECB, Bank of England and US Fed interest rate trend and forecast

12

% 7

Forecast

14

10

Forecast

UK

8

6

Bank of England

5

ROI*

6

4 ECB

3

2 0 2000

2

NI

4

US Fed

2004

2008

2012

2016

2020

Source: Department of the Environment, Community & Local Government, CSO, DCLG, ASHE, Ernst & Young Economic Eye

1

* ROI data based on preowned housing UK & NI based on mix-adjusted house prices

0 2000

2005

2010

2015

2020

Source: European Central Bank, US Federal Reserve, Bank of England, Ernst & Young Economic Eye


20

Chapter 2 2.5 Island population almost 100,000 higher than previously recorded Both ROI and NI recently conducted a population census covering the year 2011. For ROI this was the first population census since 2006 - the census is undertaken every five years in ROI. For NI it was the first since 2001, where like the UK, the census is decennial. Compared to previous mid-year population estimates, the Island of Ireland is now recorded as having almost 100,000 more people, equivalent to 1.6% of the total population. To put this in context of the chapter’s theme of consumer spending, and applying average per capita consumer spend metrics, 100,000 more people is equivalent to €1.7bn of additional consumer spending. ROI’s population has been revised up by 91,000 (2.0%) and NI by 7,000 (0.4%). The large revision for ROI is perhaps not surprising given the scale of in and out migration between 2006 and 2011. Cumulative in migration over the five-year period was revised up by 110,000 and out migration revised up by 23,000. Cumulative natural increase was revised up by 4,000. The ROI Quarterly National Household Survey (QNHS), the main source of labour market data, has not yet been fully benchmarked to the new Census population count. It will be important to observe any notable shifts in labour market metrics when the QNHS is revised, for example will previous estimates of unemployment and unemployment rates be revised up? Demographics remains a key influence on the All-Island economy – via consumer demand, housing demand, public services demand, the labour market, welfare costs, etc. This is especially true for ROI where demographics have been extremely dynamic over the last 10-15 years, and in the UK as well, where migration is an emotive political subject. As economic conditions in ROI improve further and unemployment starts to gradually fall, the summer 2013 Economic Eye predicts that current high net migration outflows will stabilise and decline gradually over the next decade, reaching zero by around 2020. This however would still be equivalent to a cumulative net migration outflow of approximately 220,000 between 2010 and 2020, compared to a cumulative net inflow of 515,000 between 1997 and 2009. This migration outlook is also a key determinant of ROI’s unemployment outlook given the direct link between migration and labour supply.

21


In NI net migration has returned to its more normal neutral state following the temporary net inflow period post EU-accession and the strong period of growth pre-recession. NI net migration is projected to remain neutral over the forecast period. Arguably, if NI’s labour force was more flexible and mobile, a net migration outflow similar in pattern to ROI might be expected. This is particularly true for young graduates, given the unemployment outlook and more limited employment opportunities at home. In fact, while not wishing to encourage a brain drain of talent, the opportunity for young NI graduates to gain international work experience and later return could be a positive for the local economy, as it has proven to be in ROI. In the UK, net migration fell significantly in the year ending June 2012. 163,000 more people came to live in the UK for 12 months or more than had left, compared with 247,000 the year before. The ONS said this was driven by a drop in immigration, and study remained the most common reason to come to the UK. The UK Government wants to cut net migration to the 'tens of thousands' by 2015, although this is likely to be difficult to achieve unless economic conditions deteriorate significantly. Fig 2.8

ROI, NI and UK net migration trend and forecast % of total population 3.0 ROI

2.5

Forecast

2.0 1.5 1.0 NI

0.5 0.0 -0.5

UK 1995

2000

2005

2010

-1.0 Source: CSO, NISRA, ONS, Ernst & Young Economic Eye

2015

2020

The final demographic feature to highlight is the ageing of the population. According to official (CSO and NISRA) projections, ROI’s 65+ population is forecast to rise by 44% over the next decade, and NI’s by 25%. In total across the Island, this means 310,000 more 65+ aged persons by 2022. ROI’s 65+ population share is projected to be 15% in 2022 and 18% for NI, reflecting the still younger age structure of ROI.

This key demographic trend has a number of implications: it creates business opportunities from the so-called ‘silver economy’, leads to rising pension and health budget pressures and calls for changes to the retirement age, etc. The ageing of the population, and overall growing total population on the Island, explain why it is difficult to cut or even hold constant in real terms health and social care budgets, and why health and social care employment in future is more likely to rise than fall.

Fig 2.9

ROI, NI and UK elderly population trend and forecast Index 1992=100 200 190

Forecast

ROI

180 170 160 150 140

NI UK

130 120 110 100 1992 1996 2000 2004 2008 2012 2016 2020

In NI, the Health Minister recently performed a U-turn on the policy of closing residential care homes. While commendable from the perspective of caring for the needs of the elderly, this decision does not address the underlying issue of constrained fiscal resources versus ever rising spending demands, and from a budget sector that does little to address the needs of the economy, which ultimately funds these areas of spending and which the Executive says is its priority. For ROI, a recent OECD report recommended that the future pension age must rise above 68 in order to fix the country’s pension ‘time bomb’. The report states that the Government will have to increase the future retirement age past 68 with mandatory enrolment in private pension schemes if it is to ensure sustainable, equitable cover into the future.

Source: CSO, NISRA, ONS


22

Chapter 3 Risk assessment There are multiple economic downside risks across the Island. Some risks apply in both jurisdictions – such as cooling export demand, austerity and housing market difficulties – while others are unique to either ROI or NI – such as the scale of banking problems (ROI) and welfare reform (NI).

Tables 3.1 and 3.2 set out the top 10 downside economic risks for the two economies and whether the scale of the risk has increased, decreased or remained the same since the winter 2012 report. This table is updated biannually in Economic Eye reports to assist business in tracking and planning their risk strategy.

Table 3.1

ROI downside risk monitor Rank*

Risk

Commentary

Change in risk last six months**

1

Eurozone crisis

Mixed last six months for Eurozone. Greater stability in some peripheral countries and more proactive action from the European Commission and ECB. Offset by political instability in Italy and the Cyprus bailout.



2

Cooling export demand

Downgrades to near-term economic growth outlook for Eurozone, UK and US. Although US economy remains strong.



3

Further fiscal austerity

ROI ahead of deficit reduction target. Potential €1bn additional budget available following restructuring of promissory notes and a reprofiling of official loans with the EU. Europe now following IMF lead in thinking austerity may be reaching its limit and stimulus may be required.



4

Unresolved domestic banking problems and limited lending

IMF critical of lack of progress in dealing with non-performing loans. Banks still making losses. Non-performing loans undermining bank lending and investment



5

Consumer drag

Consumer spending and retail sales beginning to recover as labour market stabilises. But new state insolvency service set up to broker deals between debtors and lenders. Could force homeowners in mortgage trouble to alter consumer spending patterns.



6

On-going housing market difficulties and repossession risk

Almost one in eight private residential mortgages are in arrears yet repossessions have been remarkably low. The new personal bankruptcy law and targets will force banks to address bad property loans in a sustainable way.



7

Bank deposit risks

Some concerns that the Cyprus bailout programme will become a blueprint for troubled banking sectors elsewhere, including ROI.



8

Rising inflation pressures

Inflation increased between 2010 and early 2012 to above 2.0% but has since fallen back to 0.5% in March 2013.



9

Interest rate hikes

ECB recently cut interest rates by a quarter-point, the first cut since July 2012. ECB interest rate not expected to be increased for a number of years.



Skill supply shortages

Despite high unemployment, certain businesses in key sectors are still expressing challenges in recruiting, including the fast growing and increasingly key export computer service sector.



10


Note: * Risks ranked in order of the potential severity of their downside impact on the economy

**Arrow legend:

23

 Risk risen sharply in last six months  Risk fallen in last six months  Risk risen in last six months  Risk fallen sharply in last six months  No change in risk last six months


Table 3.2

NI downside risk monitor Rank*

Risk

Commentary

Change in risk last six months**

1

Fiscal austerity

Compared to ROI, NI's austerity has been mild. UK austerity could be more severe in latter half of decade. Although a global switch away from austerity to stimulus, resistance from the Executive and a different Government in Westminster may mean severe austerity does not occur.



2

Weak labour market

Full-time employment levels and unemployment yet to stabilise, with medium-term outlook remaining difficult.



3

Welfare reform

Changes starting to be introduced. Likely to lead to further rises in unemployment and loss of household income.



4

Housing market difficulties

Some signs of price falls levelling off and transactions increasing. But many home-owners with interest-only mortgages (40% of total mortgages) now face a rise in mortgage payments, as interest-only mortgage periods have expired.



5

Cooling export demand

Downgrades to near-term economic growth outlook for Eurozone, UK and US. Outlook is for modest strengthening of £ versus €. Exporting to ROI and Eurozone will become more challenging for NI firms.



6

Eurozone crisis

Mixed last six months for Eurozone. Greater stability in some peripheral countries and more proactive action from the European Commission and ECB. Offset by political instability in Italy and the Cyprus bailout.



7

Changes to Selective Financial Assistance (SFA) funding rules

Less likely capital grants regime will change, maintaining Invest NI's capacity to attract new investors.



8

No Plan B from Executive

Concern that Executive has no Plan B for the economy if Corporation Tax powers are not devolved.



9

Inflation

UK inflation still exceeding 2.0% target. Despite easing, annual inflation remains high at 2.8% in March 2013.



10

Corporation Tax

Decision postponed until autumn 2014 after Scottish independence referendum.




Note: * Risks ranked in order of the potential severity of their downside impact on the economy

**Arrow legend:

 Risk risen sharply in last six months  Risk fallen in last six months  Risk risen in last six months  Risk fallen sharply in last six months  No change in risk last six months


24

Summary Summary Since the winter 2012 Economic Eye report, there has been further good news for the ROI and UK economies, but less so for the NI economy. The ROI economy has now registered two successive calendar years of positive GDP growth; domestic demand is starting its long road to recovery; the labour market is stabilising; deficit reduction is ahead of target; and the Government has already successfully returned to financial markets to borrow. Together, these point to ROI having a smooth exit from its bailout programme, the first Eurozone country to do so. The Economic Eye accurately asserted some time back that 'Ireland is not Greece', a view which these recent positive economic data and the prospect of a successful bailout exit would vindicate. The UK economy avoided a triple-dip recession with stronger than expected growth in 2013 Q1, while the labour market continues to show significant net job creation. In fact UK employment performance is such that it suggests the economy may be performing stronger than official GDP data indicates. In contrast, good news is harder to find for NI. The labour market has not yet stabilised and the decision on devolving Corporation Tax powers has been postponed until autumn 2014, after the Scottish independence referendum. While there has been plenty of good news, the latest summer 2013 Economic Eye outlook for growth across the Island in 2013 is subdued at 0.7%. The ROI economy is forecast to grow by 0.8% in 2013 and NI by 0.2%, moderately weaker outlooks than six months ago. Downgrades to growth in key export markets – the UK, Eurozone and US – are contributing to a slowdown in the export outlook for the Island. It will take a much stronger export performance than this, together with a complete recovery in domestic demand, for the Island economy to get back on track and make significant in-roads into the current high level of unemployment.

25


Significant downside risks also remain, some affecting both jurisdictions and some more unique to one or the other. For ROI, downside risks include: the lack of bank progress in dealing with non-performing loans with spill-over effects on lending; the introduction of a tougher personal bankruptcy law which may affect consumer spending and home repossessions; and failure to reach an agreement with the public sector on Croke Park II. NI’s specific downside risks include: potential further housing market difficulties as interest-only mortgage arrangements, representing 40% of total mortgages, expire; a strengthening of £ Sterling versus the euro, hurting exports to ROI and the Eurozone; and delayed austerity, with the most severe UK spending cuts potentially yet to come. Against this backdrop, the Governments north and south face some crucial decisions. ROI, like many other countries, must decide whether to continue on the same tough austerity path; or ease off and exploit the fiscal space created by the more relaxed stance of the Troika potentially towards austerity, and the restructuring of promissory notes and a reprofiling of official loans with the EU. The latter have both reduced short-term interest repayment obligations. But the question is not only whether to spend the estimated ‘available’ €1bn in the next budget that would allow deficit reduction to still remain on track. There is also the question of what competing spending areas additional fiscal resource should be spent on – public sector remuneration, capital projects, social sectors, etc., - and having in place ready-to-go spending programmes. Whilst recognising the sacrifices made to date by public sector workers in ROI, the decision on directing some of this additional resource to public sector workers to get agreement on Croke Park II, versus providing a stimulus to struggling sectors such as construction via capital projects, needs to be very carefully considered.

For NI, a key decision is what to do in terms of economy policy between now and autumn 2014 when a decision on Corporation Tax is expected. This may take the form of coming up with complementary and reinforcing policies to maximise the benefit of a lower Corporation Tax rate, or alternatively coming up with a plan B for the economy if the decision on Corporation Tax is unfavourable. These decisions will ultimately impact on the medium and long-term outlooks for the ROI and NI economies. The latest summer 2013 Economic Eye report continues to forecast faster economic growth for ROI over the next decade for the same reasons as previous reports – namely its largely, more dynamic, export-orientated multinational business base, more enviable sector mix and stronger skills supply. The fact that ROI may only have a couple of more years of austerity, while NI is even yet to face potentially its most severe period of austerity, is another important explanatory factor in the divergence of the growth forecasts across the Island. History may eventually judge austerity as having worked for ROI, if it exits the bailout programme on schedule and returns to growth as forecast, and for its positive impact on economic governance. But the interim pain and losses should not be overlooked, as they sometimes are by the Troika in assessing the success of the bailout programme. ROI’s GDP and GNP per capita relative to the UK – akin to relative living standards - have fallen sharply since the recession commenced. The result is that for the first time since the turn of the century, ROI GNP per capita is now below the UK level. This is not to mention the impact on unemployment, return of large scale involuntary emigration and negative equity in the housing market.

NI’s relative GDP per capita position has fallen since the onset of the recession and is forecast to continue to gradually decline. Without a reduction in the rate of Corporation Tax, there is little to suggest from NI’s economic base, economic policy ambition and appetite for real structural economic reform and tough decision-making, that the NI economy can out-perform the UK economy, ride the crest of waves of new growth sectors, or be any better than a '2% annual growth' economy. Whether this is good enough for NI businesses and citizens remains to be seen. Fig 4.1:

ROI, NI and UK GDP and GNP per capita outturn and forecast (UK=100) UK=100 150

Forecast

140 130

ROI (GDP)

120 110 100

UK=100

90

ROI (GNP)

80 70

NI (GDP)

60 1990 1994 1998 2002 2006 2010 2014 2018 2022 Source: CSO, ONS, NISRA, Ernst & Young Economic Eye


26

Annex Table A.1

ROI economic growth performance by expenditure component (real quarterly % growth) Private consumption


Investment

Exports

Imports

Net stocks % GDP

GDP

GNP

2008 Q1

0.1

0.1

0.8

-1.8

-1.7

4.5

-1.6

1.1

2008 Q2

-2.0

-0.6

-13.3

-0.8

-3.4

-1.0

-1.6

-1.6

2008 Q3

0.5

-0.1

5.9

-0.8

0.3

0.7

-0.3

-2.5

2008 Q4

-1.8

0.4

-15.7

-0.7

-3.7

0.9

-3.5

-2.7

2009 Q1

-3.0

-1.1

-11.8

-1.6

-4.2

-1.4

-0.3

-1.3

2009 Q2

-0.8

-2.3

-2.8

-1.1

-1.1

-0.8

-1.3

-2.6

2009 Q3

-0.5

-3.1

-4.0

-0.8

-3.5

-1.1

-1.7

-2.5

2009 Q4

0.0

-0.5

-6.6

0.1

0.9

-1.1

-0.9

-0.7

2010 Q1

1.0

-2.7

-18.1

3.2

0.2

-0.6

0.8

0.9

2010 Q2

1.1

-0.4

15.2

2.4

5.3

-0.6

0.4

1.7

2010 Q3

-0.1

-2.1

-13.0

4.0

1.7

-0.9

0.4

2.1

2010 Q4

-1.2

-0.3

-6.3

-1.4

0.0

0.3

-1.2

0.6

2011 Q1

-0.8

-1.1

-1.2

1.5

0.0

-0.2

0.5

-4.7

2011 Q2

-0.9

-0.6

3.1

2.1

-2.3

0.0

2.1

0.1

2011 Q3

-1.1

-1.6

-14.5

0.8

-0.9

0.0

-0.6

1.0

2011 Q4

1.1

-2.7

5.8

0.1

-1.1

0.8

0.9

-0.3

2012 Q1

-1.5

1.6

14.3

2.1

5.2

-0.3

-0.3

0.4

2012 Q2

-0.1

-2.9

-14.9

-0.4

-5.3

-0.2

0.7

4.7

2012 Q3

0.7

-0.2

5.6

0.0

1.9

0.2

-0.4

-1.1

2012 Q4

1.0

-0.7

-0.1

0.5

0.8

-0.3

0.0

-0.8

Source: CSO

27


Table A.2

UK economic growth performance by expenditure component (real quarterly % growth) Private consumption


Investment

Exports

Exports of goods

Exports of services

Imports

Net stocks % GDP

GDP

2008 Q1

-0.9

1.7

-0.5

1.7

1.0

2.8

0.0

0.5

0.1

2008 Q2

-1.4

0.5

-5.6

1.4

2.3

0.3

0.0

0.8

-0.9

2008 Q3

-1.3

0.1

-6.1

-1.2

-1.1

-1.5

-2.9

1.1

-1.8

2008 Q4

-1.7

0.8

-1.8

-3.5

-4.9

-1.5

-4.3

0.5

-2.1

2009 Q1

-0.3

-1.0

-6.1

-6.0

-8.3

-2.9

-6.6

-1.3

-1.5

2009 Q2

-1.3

0.7

-3.4

-1.0

-1.2

-0.8

-1.1

-1.3

-0.2

2009 Q3

0.5

0.7

0.4

1.4

2.0

0.6

-0.2

-0.3

0.4

2009 Q4

1.0

0.5

0.3

2.7

4.3

0.5

3.4

-0.8

0.4

2010 Q1

0.0

-0.2

5.1

-0.4

0.1

-1.2

2.0

-0.6

0.6

2010 Q2

0.9

0.1

-2.7

4.0

5.4

2.1

2.9

-0.3

0.7

2010 Q3

-0.2

-0.7

2.8

0.9

1.0

0.8

2.1

0.0

0.6

2010 Q4

0.3

-0.1

-1.7

3.3

3.2

3.5

1.5

0.8

-0.4

2011 Q1

-1.1

-0.3

-2.4

1.3

3.1

-1.1

-2.9

-0.1

0.5

2011 Q2

-0.5

0.5

-0.2

-1.8

-3.3

0.4

-0.7

-0.1

0.1

2011 Q3

-0.1

0.0

0.6

-0.2

-0.3

0.0

0.6

0.3

0.6

2011 Q4

0.5

0.3

-0.3

3.1

4.2

1.6

1.4

1.2

-0.1

2012 Q1

0.4

2.9

0.5

-1.5

0.1

-3.8

0.6

0.3

-0.1

2012 Q2

0.5

-1.7

1.7

-1.1

-2.1

0.3

1.3

0.1

-0.4

2012 Q3

0.3

0.3

-0.4

1.8

3.1

-0.1

0.3

0.3

0.9

2012 Q4

0.4

0.6

-0.2

-1.6

-1.6

-1.8

-1.0

0.7

-0.3

Source: ONS


28

Annex Table B.1

ROI key indicator forecasts ROI forecasts (annual % growth unless stated) GDP

2008

2009

2010

2011

2012

2013

2014

2015

-2.1

-5.5

-0.8

1.4

0.9

0.8

2.2

2.6

Private consumption

-0.1

-5.4

1.0

-2.4

-0.9

-1.6

0.0

0.6


0.6

-4.4

-6.5

-4.3

-3.8

-2.7

-1.3

-1.1

-10.2

-27.5

-22.6

-12.8

1.1

-3.4

4.9

4.9

Investment Exports

-1.1

-3.8

6.2

5.0

2.9

2.2

4.2

4.5

Imports

-2.9

-9.7

3.6

-0.3

0.3

1.6

3.2

3.7

Employment

-0.7

-7.9

-4.0

-1.8

-0.6

-0.2

-0.2

0.5

ILO unemployment (000s)

146

267

302

317

316

298

292

283

ILO unemployment rate

6.4

12.0

13.9

14.6

14.7

14.0

13.8

13.3

General government balance (% GDP)

-7.4

-14.0

-31.4

-13.3

-7.7

-6.8

-4.6

-2.9

General government gross debt stock (% GDP)

45.6

67.6

93.1

105.0

108.1

113.3

114.3

113.0

euro-$ (annual average)

1.47

1.39

1.33

1.39

1.28

1.28

1.21

1.17

euro-£ (annual average)

0.79

0.89

0.86

0.87

0.81

0.86

0.85

0.80

CPI inflation

4.0

-4.5

-0.9

2.6

1.7

1.4

1.7

1.6


29


Table C.1

UK key indicator forecasts UK forecasts (annual % growth unless stated) 2008

2009

2010

2011

2012

2013

2014

2015

-1.0

-4.0

1.8

1.0

0.3

0.6

1.9

2.5

Private consumption

-1.6

-3.0

1.3

-1.1

1.2

1.0

1.5

2.0


1.6

0.8

0.4

-0.3

2.2

0.2

-0.7

-0.4

Investment

-4.6

-13.7

3.5

-2.9

1.5

0.8

5.4

6.3

GDP

Exports

1.2

-8.2

6.4

4.5

-0.2

-0.1

3.5

4.4

Imports

-1.8

-11.0

8.0

0.0

2.7

-0.3

2.7

3.4

0.7

-1.6

0.2

0.5

1.2

1.3

1.1

1.1

1,783

2,390

2,476

2,564

2,548

2,533

2,460

2,366

5.7

7.6

7.9

8.1

7.9

7.8

7.5

7.2

Public sector net borrowing (% GDP)

4.9

10.8

10.0

7.9

6.5

6.3

5.8

4.8

General government gross debt stock (% GDP)

47.7

62.4

75.4

81.8

87.7

91.6

94.3

95.4

£-$ (annual average)

1.85

1.57

1.55

1.60

1.59

1.48

1.43

1.47

£-euro (annual average)

1.26

1.12

1.17

1.15

1.23

1.16

1.18

1.25

3.6

2.2

3.3

4.5

2.8

2.8

2.0

1.6

Employment ILO unemployment (000s) ILO unemployment rate

CPI inflation Source: ONS, Ernst & Young Economic Eye


30

Annex Table D.1

NI key indicator forecasts NI forecasts (annual % growth unless stated) 2008

2009

2010

2011

2012

2013

2014

2015

GVA

-1.5

-4.1

2.0

1.6

-0.8

0.2

1.7

2.2

Employment

1.5

-2.6

-0.3

-2.6

-1.7

-0.6

0.1

0.3

ILO unemployment (000s)

37

52

59

62

64

70

72

70

ILO unemployment rate

4.6

6.6

7.3

7.4

7.6

8.3

8.5

8.3

£-$ (annual average)

1.85

1.57

1.55

1.60

1.59

1.48

1.43

1.47

£-euro (annual average)

1.26

1.12

1.17

1.15

1.23

1.16

1.18

1.25

CPI inflation (UK)

3.6

2.2

3.3

4.5

2.8

2.8

2.0

1.6

Source: ONS, Ernst & Young Economic Eye

Table E.1

ROI sector employment performance and forecasts Employment change (000s) 1990 - 2000

2000 - 2008

2008 - 2012

2012 - 2022


-26

-11

-30

-7

Industry

60

-27

-55

10

Construction

87

78

-139

27

Services

400

393

-67

154


85

71

-40

29


30

15

-4

10


43

21

-10

12


22

10

9

17


34

32

-6

24


40

36

-13

33


26

27

-13

22


16

25

-7

-2

Education

32

39

-1

-8


42

89

19

12

Other services

29

27

-2

5

Total

563

421

-290

184


Note: ROI data based on people based total employment Industry = Manufacturing, Mining and Utilities

31


Table E.2

NI sector employment performance and forecasts Employment change (000s) 1990 - 2000

2000 - 2008

2008 - 2012

2012 - 2022


-10

-3

-1

1

Industry

-6

-19

-10

-5

Construction Services Distribution and retail Transport and storage Accommodation and food services

6

20

-26

2

93

103

-24

23

21

23

-11

5

5

6

-1

3

16

5

-2

2


5

4

0

4


4

9

0

1


7

6

-1

5


10

19

-2

8


1

0

-5

-8

Education Health and social care Other services Total

8

6

-1

-3

13

21

-1

1

2

3

0

5

83

100

-61

21

Source: DETI, LFS, Ernst & Young Economic Eye

Note: NI data is a jobs based measure of total employment Industry = Manufacturing, Mining and Utilities


32

Annex Table E.3

UK sector employment performance and forecasts Employment change (000s) 1990 - 2000 Agriculture, forestry and fishing

2000 - 2008

2008 - 2012

2012 - 2022

-120

-1

20

-53

-1063

-1156

-132

-265

Construction

-262

382

-298

252

Services

2118

3143

450

2574

282

154

-149

558

Industry

Distribution and retail Transport and storage

-9

143

53

218


140

206

88

208


305

80

54

190


20

222

-39

157

273

514

187

653


541

446

16

476


-137

102

-155

-167

Education

183

391

154

-124



332

664

316

87

Other services

189

223

-74

318

Total

674

2368

41

2508

Source: ONS, LFS, Ernst & Young Economic Eye

Note: UK data is a jobs based measure of total employment Industry = Manufacturing, Mining and Utilities

33



34

Notes

35



36

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