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The Irish Economic Update – Doing Relatively Well September 2014 Oliver Mangan Chief Economist AIB April 2013 aibeconomicresearch.com 1 Irish economy recovering after deep recession Irish economy boomed from 1993 to 2007 with GDP up by over 250% – Celtic Tiger Very severe three year long recession in Ireland from 2008-2010. GDP fell by 10% Collapse in construction activity and banking system, severe fiscal tightening, high unemployment GDP in 2010 back to 2005 levels but still over 25% higher than in 2000, highlighting that the economic crash came after a very strong period of growth, unlike in other countries Ireland entered a three year EU/IMF bail-out programme at end 2010 as it could no longer access funding on global capital markets Ireland exited its financial assistance programme on schedule in December 2013, without a precautionary credit line - has very large cash balances and no problem with market access Budget deficit has declined at quicker than expected pace in past four years Ireland benefits from the pick up underway in world economy, given its large export base Domestic economy recovering, led by rebound in investment and labour market GNP rose by 1.9% in 2012 and 3.2% in 2013. GNP up by 3.4% yoy in Q1 2014 2 Upbeat tone to Irish data continues in 2014 GNP rose by 3.2% in 2013. GNP up by 3.4% yoy in Q1 2014 with GDP up by 4.1% yoy Strong pick up in mfg PMI in past year – hits highest level since 1999 in August Surge in manufacturing output in H1 2014 – up 24% yoy in Q2 Exports rebound strongly in H1 2014. BoP remains in large surplus Very strong services PMI data this year – index well over 60 in recent months, at 7 year highs Housing market improving, while commercial property market recovering strongly Construction PMI soars to above 60 – averages over 60 year-to-date, at record highs OECD leading indicator for Ireland rises strongly – hits best level in H1 2014 since 2008 Consumer confidence in July at its best level since early 2007 Strong rise in core retail sales in recent quarters – up by 4% yoy in Q2 2014 Car sales surge by 30% year-to-date – best sales since 2008 Employment rises for 7 consecutive quarters, up 1.7% yoy in Q2 2014 Declining Live Register, with jobless rate falling from 15% in H1 2012 to 11.2% by Aug 2014 Further large fall in budget deficit in 2014: spending below target, taxes ahead of schedule 3 Strong Irish economic indicators GNP & Employment % 10 Ireland Mfg and Services PMIs 70 8 65 6 4 Services 60 2 55 0 50 -2 Manufacturing -4 45 -6 40 -8 35 -10 -12 Q1 04 Q1 05 Q1 06 Q1 07 GNP % YoY (3Qtr.Mov.Avg.) Q1 08 Q1 09 Q1 10 Q1 11 Employment % YoY Q1 12 Q1 13 Q1 14 30 Aug-04 Aug-05 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 Aug-12 Aug-13 Aug-14 Source: Thomson Datastream, Investec Source: CSO & Thomson Datastream Industrial Production ( 3 Mth Moving Average Vol Y/Y %) Consumer Confidence (ESRI - KBC) 25 110 20 15 90 10 5 70 0 50 -5 -10 30 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Source: ESRI - KBC, Thomson Datastream -15 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Source: Thomson Datastream 4 Labour market has improved – good job growth Year Average 2011 2012 2013 2014(f) 2015(f) 2016(f) Unemployment Rate % 14.6 14.7 13.1 11.5 10.5 9.5 Labour Force Growth % -0.9 -0.6 0.4 -0.2 0.3 0.9 Employment Growth % -1.8 -0.6 2.4* 1.5 1.5 2.0 Net Emigration : Year to April (‘000) 27.4 34.4 33.1 21.4 15.0 10.0 Source: CSO and AIB ERU forecasts *Note: Employment ex Agriculture: +1.3% in 2013 Employment (% Chg YoY) Unemployment Rate (%) 6 16 Private 4 15 2 14 0 13 -2 12 -4 Total 11 -6 -8 Public 10 9 -10 -12 2009Q1 2009Q3 2010Q1 2010Q3 2011Q1 2011Q3 2012Q1 2012Q3 2013Q1 2013Q3 2014Q1 Source: CSO 8 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Source: Thomson Datastream 5 Exports pick up again as pharma patent cliff abates Ireland a very open economy – exports, driven by huge FDI, equated to 105% of GDP in 2013 Exports as % of GDP 2013 Finland UK Major gains in Irish competitiveness since 2009 Germany Goods exports fell by 4% in 2013 on sharp drop in pharma output (patents expire). Rebound in H1 2014 France Italy Ireland Service exports rise strongly since 2010 as new FDI broadens export base and global recession ends Portugal Spain 0 10 20 30 40 50 Total exports rise by 7.4% yoy in Q1 2014 60 70 80 90 100 110 Source: Thomson Datastream Irish Exports of Services Unit Labour Costs 2009-2013 (% Change) (Volume, 3 Qtr Moving Average, YoY% Change) 20 Portugal Spain 15 Ireland 10 UK 5 Eurozone 0 Italy -5 France Germany -14 -12 -10 -8 -6 -4 -2 0 2 4 6 8 10 12 Source: EU Commission 14 -10 Q1 2006 Q1 2007 Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1 2012 Q1 2013 Source : CSO Q1 2014 6 Impact of FDI on economy (Source IDA) KEY FDI IMPACTS ON THE IRISH ECONOMY - 1,050 multinational companies - €121bn Exports (70% of Irish exports) - 161,000 Jobs in FDI, 275,000 in total - 70% of Corporation Tax - €11bn Spending on services/materials - €8bn in Payroll - 67% of Business R&D expenditure WORLD LEADERS CHOOSE IRELAND - 8 of the top 10 in ICT - 9 of the top 10 in Pharmaceuticals - 17 of the top 25 in Medical Devices - 3 of the top 5 Games companies - 10 of the ‘top born on the Internet’ firms - More than 50% of the world’s leading Financial Services firms 7 Domestic economy recovers over past year Domestic economy contracted by 23% from its peak in Q1 2008 to mid-2012 Construction Investment (% YoY) 30 20 Construction investment big drag on GDP growth - fell from 13-14% of GDP in 2004-08 to 5% in 2012 % Total construction output rose by 13.7% in 2013 House building stabilised last year and has started to pick up in 2014 from very low levels Pick-up in commercial property market last year which 10 0 -10 -20 -30 -40 Q1 2005 Q1 2006 Q1 2007 Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1 2012 Q1 2013 Q1 2014 Source : CSO has continued in 2014 Irish Retail Sales (ex autos) Business investment (ex volatile transport, mainly planes) rebounding – up 40% yoy in Q1 2014 4 Total investment (ex transport) up 14.5% yoy in Q1 0 Strong rise in retail spending over past year, up 3.4% -2 yoy in H1 2014, with car sales up by 30% year-to-date -4 Fiscal drag has eased considerably in 2013-14 -6 Domestic spending (ex transport) rose by 0.4% in 2013 and up by 3.3% yoy in Q1 2014 -8 (Volume, Yr-on-Yr % Change) 2 Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1 2012 Q1 2013 Q1 2014 Source: Thomson Datastream 8 Dublin house prices surge amidst a lack of supply Housing output fell by 90% but now past the bottom of cycle National House Price Inflation % 3.0 % 30 Much of the new housing stock overhang eliminated 2.0 20 House prices declined sharply – fell by over 50% between their peak in late 2007 and early 2013 1.0 10 0.0 0 House prices now rebounding – up 17.5% from low Dublin prices up by 34% and non-Dublin prices rise by 7% from their troughs -1.0 -10 -2.0 -20 -3.0 Jun-06 Jun-07 Jun-08 Jun-09 Month-on-month : LHS Nationally, prices up 13.4% yoy in July 2014. Dublin up 23%, non-Dublin rise 5% yoy in July Jun-10 Jun-11 Jun-12 Jun-13 -30 Jun-14 Source: CSO Year-on-year : RHS Irish Residential Property Price Indices House prices nationally are now 42.3% below peak level hit in 2007 (Dublin now 43% below peak) 140 Rents also rebound – up 20% from lows 110 (Base 100 = Jan'05) 130 120 100 Decline in number of second-hand properties for sale. Very low level of new house building 90 Shortage of family homes emerges in Dublin 60 Current level of house building nowhere near meeting estimated demand 40 Jan-05 80 70 50 Jan-06 Jan-07 National Prices Jan-08 Jan-09 Ex-Dublin Prices Jan-10 Jan-11 Dublin Prices Jan-12 Jan-13 Jan-14 Source: CSO via Thomson Datastream 9 House building rising from very depressed levels % 30 House building is beginning to pick up but activity is still at very low levels Big jump in new housing registrations and commencements, but still at depressed levels Housing Repayment Affordability * Housing completions 8,300 in 2013; 8,500 in 2012 Latest data show housing completions also picking up (+32% in 2014), especially in Dublin Recovery in house prices should help spur more 26 22 18 14 * % of disposable income required for mortgage repayments for 2 income household, 30 year 92% mortgage. Based on permanent tsb/ESRI national house price & CSO House price index 10 Jan-96 Jan-98 Jan-00 Jan-02 Housing affordability, though, still at levels pertaining in 1997, before the boom started Jan-08 Jan-10 Jan-12 Jan-14 Housing Completions 100,000 90,000 80,000 Mortgage lending up almost 50% in H1 2014, though still at low level in absolute terms Jan-06 Sources: AIB, permanent tsb/ESRI, CSO, Dept of Finance, building activity Jan-04 Government announces measures to help boost house building activity 70,000 60,000 50,000 40,000 30,000 20,000 10,000 Completions may hit 11,000 this year but will take 0 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015(f) 2017(f) a couple of years to get near 25,000 demand level Source: CSO; DoEHLG and AIB ERU 10 AIB Model of Potential Housing Demand 2010-2016 Calendar Year 2010 2011 2012 2013 2014 2015 2016 21,500 16,500 15,500 16,000 17,500 18,500 18,000 Indigenous Population Growth 27,500 24,500 24,000 23,500 23,000 22,500 22,000 Migration Flows -9,000 -6,500 -10,000 -9,500 -6,000 -5,000 -4,000 Increased Headship 3,000 3,000 3,000 3,000 3,000 3,000 3,000 Second Homes 1,000 1,000 1,000 1,000 1,000 1,000 1,000 Replacement of Obsolete Units 4,000 4,000 4,000 4,000 4,000 4,000 4,000 Total POTENTIAL Demand 26,500 25,000 22,000 22,000 25,000 24,500 25,000 Completions 14,500 10,500 8,500 8,300 11,000 15,000 20,000 -12,000 -14,500 -13,500 -13,700 -14,000 -9,500 -5,000 Household Formation of which POTENTIAL Impact on Vacant Stock Sources: CSO, DoECLG, AIB ERU 11 Budget deficit in marked decline, little funding required Some €30bn of fiscal tightening implemented in 2008-2014 period. Little more to be done Further marked fall in budget deficit in 2014. On course for sub 3% deficit by 2015 Primary budget (i.e. excluding debt interest costs) back in surplus in 2014, with a primary budget surplus of over 2% of GDP by 2015 General Gov Budget Deficit* (% GDP) 12 10 8 6 4 2 Debt interest not overly high at 5% of GDP 0 Maturity profile of debt greatly extended. Modest amount of bonds mature in 2015-17 Very high government cash balances of €25 billion at mid-year. Exchequer fully funded to end 2015 Ireland exited its EU/IMF bailout programme on schedule in December 2013 Irish bonds yields have fallen sharply with five year yields at 0.7%, ten year falls to 1.8% Sovereign debt ratings upgraded; two rating agencies now have Ireland at A- 2008 2009 2010 2011 2012 2013 2014(f) 2015(f) Source : IMF, Dept of Finance, AIB *Excludes banking recapitalisation costs in 2009-11 Irish Benchmark Yields % % 20 20 18 18 16 16 14 14 12 12 10 10 8 8 6 6 4 4 2 2 0 Jan-11 0 Jul-11 Jan-12 5 Year Jul-12 10 Year Jan-13 Jul-13 Jan-14 Jul-14 Source: Thomson Reuters 12 Gov debt stabilises; private sector deleveraging General Gov Net Debt* (% GDP) Debt Interest (% GDP) 10 120 9 100 8 7 80 6 5 60 4 40 3 2 20 1 0 0 2008 2009 2010 2011 2012 2013(e) 2014(f) 2015(f) 2016(f) 2017(f) 2018(f) * Gross General Gov Debt Less Gov Cash Balances/Deposits 1980 1990 1995 2000 2005 2010 2015 Source: NTMA; Dept of Finance Source: IMF Irish Private Sector Credit (Inc Securitisations) as % GDP % 1985 Irish Household Debt (€M) 275 210,000 250 200,000 225 190,000 200 175 180,000 150 170,000 125 160,000 100 75 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014(f) Sources: Central Bank, CSO, AIB ERU Calculations 150,000 Q1 2007 Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1 2012 Q1 2013 Source : Central Bank of Ireland 13 Ireland benefits from improving global economy The adjustment on the domestic side of economy is over so no longer a drag on growth GDP Contributions (2008-2016) % 6 3 Housing, labour market and domestic demand are all on an improving path Construction rebounding from very depressed activity levels Little further fiscal tightening required in 2015 to get budget deficit down below 3% of GDP 0 -3 -6 -9 -12 2008 Major gains made on the competitiveness front 2009 Net Exports 2010 2011 2012 Fixed Investment 2013 Govt Spending 2014(f) 2015(f) 2016(f) Personal Spending Source: CSO and AIB ERU forecasts Large, diversified export base means Ireland benefits from improving global growth Irish, Eurozone & UK Inflation (HICP Rates) 6 UK Irish lead indicators pointing to more strong growth GDP growth of 3% forecast for 2014 as pharma cliff eases. GNP to rise by 3% also GDP growth of 3.5% in 2015 and 3.7% in 2016 as domestic demand improves further Scope for upside surprises on growth, especially if exports and/or investment perform very strongly 4 2 0 Eurozone -2 Ireland -4 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 14 Source: Thomson Datastream AIB Irish Economic Forecasts % change in real terms unless stated 2011 2012 2013 2014 (f) 2015 (f) 2016 (f) GDP 2.8 -0.3 0.2 3.0 3.5 3.7 GNP -0.8 1.9 3.2 3.0 3.0 3.2 Personal Consumption -1.2 -1.2 -0.8 0.5 1.5 1.8 Government Spending -2.1 -2.1 1.4 1.3 1.5 2.0 Fixed Investment -2.9 5.0 -2.4 3.0 5.0 6.0 Domestic Spending (ex planes) -1.3 -0.5 0.4 1.5 2.0 2.5 Exports 5.5 4.7 1.1 5.0 5.0 5.0 Imports -0.6 6.9 0.6 3.7 4.0 4.2 HICP Inflation (%) 1.1 2.0 0.5 0.5 1.0 1.5 Unemployment Rate (%) 14.6 14.7 13.1 11.5 10.5 9.5 Budget Deficit (% GDP) 8.6 8.1 5.7 3.8 2.5 1.5 BoP Current A\C as % GDP 0.8 1.6 4.4 4.4 4.2 4.0 Source: CSO, AIB ERU Forecasts 15 Risks to the Irish economic recovery Recovery in the global economy is not yet secure, especially in the eurozone, with on-going risks and headwinds. This is a concern given importance of exports to the Irish economy Major changes to corporation tax, although this would have to be agreed to by Ireland Supply bottlenecks in the construction sector, especially new house building High indebtedness and scale of balance sheet repair by households (mortgage debt is very high, as are mortgage arrears). Major deleveraging has already taken place but difficult to estimate its duration Continuing credit contraction – fewer banks, tighter credit conditions, on-going deleveraging CPD Hours. The code for this presentation is 2014-0604 Note: All Irish data in tables are sourced from the CSO unless otherwise stated. Non-Irish data are from the IMF, OECD and Thomson Financial. Irish forecasts are from AIB Economic Research Unit. This presentation is for information purposes and is not an invitation to deal. The information is believed to be reliable but is not guaranteed. Any expressions of opinions are subject to change without notice. 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