Northern Ireland Quarterly Economic Review August 2009

Transcription

1 Group Economics Northern Ireland Quarterly Economic Review August 9 Contact: Richard Ramsey Group Economics or richard.ramsey@ulsterbankcm.com Pace of economic decline eases in & while some European economies return to growth To date, the economy has recorded a larger cumulative fall in private sector output than the, But the pace of decline has eased since Q 8 and relative to the The economy is expected to contract by % in 9 which compares with. for the & economies to return to modest growth of 1.% and 1.% respectively in 1 Bank of England unlikely to expand QE beyond 175bn, interest rates still set to rise by mid-1 All sectors are still contributing to output and employment declines s service sector has experienced its sharpest fall in service sector employment on record But service sectors most exposed to property show signs of growth Manufacturing industry records its first double-digit annual fall in output in 9, with pharmaceuticals the only sector recording growth in 9 Construction slowdown is set to move to commercial / infrastructure related sectors The pace of job losses continues to ease but unemployment is set to rise well into 1 Unemployment benefit claimants set to rise to 65, by mid-1 currently 51, s headline unemployment rate ILO will remain below the and RoI but is set to rise above 8% in late 9 and average 9% in 1 Rising youth unemployment and spiralling levels of economic inactivity are major concerns Net inward migration has been falling as employment opportunities dry up Public expenditure crunch draws nearer The economy is set to record a steeper decline than the Chancellor forecast back in April. As a result, the public finances are expected to deteriorate even further The Institute of Fiscal Studies warns the NHS faces an unprecedented funding slowdown will not be shielded from the forthcoming public expenditure cuts RECESSION CONTINUES TO EASE BUT RECOVERY WILL BE SLOW Last year, commentators were forecasting that economic conditions would get steadily worse as economic indicators frequently came in much weaker than expected. Over the last quarter, there have been encouraging signs that the worst of the recession is behind us, at a global, and level. Indeed, in recent months economic indicators have been coming in stronger than expected with increasing regularity. Now, we are in a transition period whereby it is clearly evident that the pace of the recession is easing and economic growth is on the horizon. Indeed, for some economies economic growth has already arrived. This point is illustrated with GDP growth in the two largest European economies coming in stronger than expected. Both Germany and France recorded quarterly GDP growth of.% in Q. This highlights that economic recovery is well underway. Turning to the. Recent GDP figures have confirmed that the recession was actually deeper than we previously thought. However, it is clear that the pace of contraction in Q (-.8%) was not as weak as the.% fall in Q 8. More recently, a number of economic surveys, such as the PMIs, and official manufacturing output figures have surprised on the upside and signalled growth. Indeed, economists, including ourselves, are now looking for a return to economic growth in Q 9. Despite the improving near-term economic news flow, the fact that the economy was much weaker than we previously thought has led us to revise down our forecast from -.% to -.. However, given the huge policy stimulus provided to date, in terms of QE and record low interest rates, we expect the economy to rebound in 1 with growth of 1.%. Unlike for the, our view of the economy has not changed over the last quarter. Indeed, the Private Sector Composite Indices, developed by Ulster Bank, highlight the pace private sector output decline eased in in both Q 8 and 9. Conversely, the rate of decline in the intensified, and at a much sharper rate than in. We expect the economy to contract by around % this year, following an estimated decline of 1% last year.

2 We expect this to be broadly in line with the average and for to fare no better than the as a whole over the course of the entire downturn. is expected to see economic growth of around 1% next year. In many respects, returning to growth is the easy part, and it does not in itself prompt us to pop the champagne corks. The biggest challenge is to recover the significant amount of output lost during the recession and this will be an extremely difficult challenge. As Mervyn King highlighted this week, levels of activity and output are more important than the rate of growth. Looking at this from an perspective, s manufacturing output is now at levels last seen 6 years ago. While manufacturing industry will record output growth later this year, it will take several years to claw back the lost output. Similarly, output within s services sectors is back to 5 levels. This levelling down in economic activity reduces the demand for labour and as a consequence the number of jobs is returning to 6 levels. The rate of unemployment growth has clearly eased and our view is that more than two thirds of the total job losses expected during the recession have already happened. We expect the number of unemployed to rise from the current level of 51, to 65, by the middle of next year. This takes the level of unemployed back to April 1997 levels. The key concerns regarding the labour market in the years ahead are the rate of youth unemployment and the level of economic inactivity in. The latter being higher than in any other part of the and has risen by a faster rate over the last 1 months. It is interesting to note that the Programme for Government set as one of its economy objectives the goal of increasing 's employment rate from 7% to 7 of the working age population by. This was an ambitious goal at the outset. However, it has been made even more challenging given that the employment rate has fallen by a hefty.5 percentage points since the launch of the PfG and is currently 65.. Over the last year this represents the sharpest fall of any of the regions. This once again highlights that the economic landscape in which targets were set has fundamentally changed. In terms of 's employment rate target, it will take the economy a number of years to get back to its PfG starting position before beginning to make the progress originally planned. The rising number of unemployed, combined with future tax rises, will lead to consumers reining in expenditure and this will present very significant challenges for consumer sensitive sectors of the services industry. The service sector is already being hit hard, with having witnessed its sharpest fall in service sector jobs on record. As s economic conditions return to the levels witnessed a few years ago, there is one positive angle to this. s house prices have experienced a huge house price correction and are likely to stabilise around 5 prices. The return to more affordable housing will be welcomed particularly by those first-time buyers who thought they had missed out on the dream of owning their own home in 7. Clearly, like other economies will face a long slow road to recovery. In recent years, s economic prosperity was boosted by simultaneous booms on a number of fronts: a net inflow of migration, a property / construction boom, a public expenditure boom and the spillovers from the Celtic Tiger boom. All of these factors benefited more than other regions. However, the flipside of this is that these drivers of growth have either gone or are about to go into reverse in the next few years, as is the case with inward migration and public expenditure growth. Therefore, we expect the period ahead will be one of lower economic growth and higher unemployment. It is our view that s sustainable growth rate will be % per annum on average which compares with an average of just over % over the period Furthermore, we expect s growth rate will be below the rate. Richard Ramsey 1 August 9

3 Summary Table Forecasts Economic Growth (real terms) Gross Value Added (GVA)..% -1.%* -.% +1.% - GDP.9%.1%.7% % RoI - GNP 6.%.1% -.% -9.% -. * Estimate for Inflation CPI (annual average).%.%. 1.9% 1. RPI (annual average).%.%.% -1.% 1.8% Labour Market f 1f ILO Unemployment Rate (annual average)..%. 7.% 9.% Claimant Count (annual average) 7,9, 7,8 9,7 6, Employee Jobs (excludes self-employed) 79,1 71,5 719, 698, 69, Housing Market Average Annual House Price 16k 1k 19k 15k 15k Housing Completions 17,965 1,7 1,75, 7,5 Financial Markets Current Sep-9 Dec-9 Mar-1 Jun-1 Period Interest Rates - ECB refi rate 1.% 1.% 1.% 1.% 1.% - Base Rate % Currencies - Eur/USD GBP/USD GBP/Eur Eur/GBP

4 I Overview of Economic Conditions recession deepened in Q but we are past the worst The first estimate for GDP Q confirmed the economy shrank by.8% q/q. The Q outturn was more than twice the.% fall anticipated while the 5. y/y decline was the sharpest fall in economic growth since records began in The construction sector recorded the steepest decline of the broad sectors, with a.% q/q decrease in Q, down from a 6.9% fall in. Since its recent peak in 8, the construction industry has seen output plummet by 1. The production industries, which includes manufacturing, contracted by.7% q/q in q. This decline was also well below the 5.1% fall reported in the previous quarter. Meanwhile, the services sector recorded a. q/q decrease which was sharper than expected but well below the 1. decline in 9. While the economy is expected to return to growth in Q, it is set to contract by. in 9. This is a full percentage point below the Chancellor s mid-point forecast in the April Budget. As a result, the public finances will be under even more pressure, than highlighted at the April Budget. NHS faces unprecedented funding slowdown According to a recent study released by the highly reputable Institute of Fiscal Studies (IFS), the NHS is facing its biggest financial challenge in its 6 year history. Even if health expenditure is relatively protected versus other Departments, it will struggle to meet the rising demand for healthcare and maintain quality. The IFS calculates that the NHS requires a 1.1% per annum increase in public expenditure, in real terms, to meet the demands from an ageing population. This compares with the historic average growth rate for the NHS of % per annum in real terms. However, given the precarious state of the public finances, delivering such a rise in funding would necessitate significant pain for other spending Departments. Even if NHS spending is held flat in real terms from April 11, the IFS calculate that this would lead to 1% of cuts, in real terms, to other Departments by 1/1. PMI also confirms the worst is behind us Recently, the MPC stated that the recession appears to have been deeper than previously thought. However, a number of surveys, notably the Purchasing Managers Indices (PMIs), suggest quarterly GDP growth is on the horizon. The services PMI rose to 5. in July, its third successive month above the all important 5 level the threshold signalling contraction / expansion. The manufacturing sector has also surprised on the upside with its July PMI nudging above 5 for the first time in 15 months. More recently, last week s official production figures revealed that manufacturing output rose by.% during the month of June. Even with output beginning to grow again, the labour market will continue to deteriorate for quite some time. The current ILO unemployment rate of 7.8% is expected to breach 1% in 1. Inflationary pressures continue to ease In recent months, the s Consumer Price Index (CPI) has not fallen as much as anticipated and currently stands at 1.8% y/y (June). This marked the first time since September 7 that CPI has fallen below the MPC s target rate of %. While the continues to experience CPI inflation, albeit at a weakening rate, other economies are experiencing deflationary pressures. For example, the RoI recorded a. y/y decrease in consumer prices in July. One key factor behind the divergence in the / EU inflation rates is the exchange rate, with a relatively weak currency (sterling) fuelling import price inflation. CPI is expected to trough at.8% by September before rising back towards % within years. Meanwhile, the RPI measure (which includes mortgage interest payments) is set to fall from its current rate of -1. for June to -.% by September. Q/Q % Growth % (in real terms) Health Spending Scenarios Potential Cumulative % Cuts to Other Departments.5 % cut for first years, 1% cut thereafter GDP Growth Jun-77 Jun-81 Jun-85 Jun-89 Jun-9 Jun-97 Jun-1 Jun-5 Jun-9 PMI Index % y/y Source: Markit Economics Q/Q LHS Source: ONS By 1-1 By RHS 8. Source: IFS; King's Fund 1. % Growth 16. Zero real growth for 6 years % growth for first years, % thereafter PMI - Business Activity / Output Manufacturing Services No Change Increasing rate of Growth Increasing rate of decline Aug-7 Nov-7 Feb-8 May-8 Aug-8 Nov-8 Feb-9 May-9 Aug-9 Source: ONS & UB Forecasts CPI & RPI Inflation Annual Change CPI RPI MPC Target Forecast Jan-8 Jun-8 Nov-8 Apr-9 Sep-9 Feb-1 Jul-1 Dec

5 No more monetary stimulus required base rates to rise in 1 As expected, the BoE s Monetary Policy Committee (MPC) maintained its Bank Rate at. for the 5 th month in a row in August. However, the surprise to financial markets came on the asset purchase programme front or quantitative easing (QE). In August, the MPC extended its asset purchase programme by 5bn to 175bn. This was in line with the requirement for an additional stimulus signalled in the May Quarterly Inflation Report (QIR). Unlike the May QIR, the August report highlights that no further stimulus is required for the MPC to hit its % CPI target in years time. The implication of this is that no more asset purchases will be made beyond the current 175bn. The CPI projections based on Bank Rate moving in line with market expectations, which implied rates rising to. by the end of 1, indicated an undershoot in the CPI target in years time. The implication of this being such rate rises were too aggressive. We maintain our view that the BoE will begin raising rates to 1.% by mid-1. However, there are risks to the timing of this move in both directions. Signs of stabilisation in the housing market According to the Nationwide Building Society, house prices in the rose for the third consecutive month in July. Recent gains have fuelled speculation that prices could end the year above where they started it. To date, the July figures are.8% higher than in January. Meanwhile, the Halifax house price survey also suggests a levelling off in the house price falls. With unemployment set to rise well into next year it is premature to be talking about a recovery in the housing market. A shortage of available properties is pushing up prices rather than a rebound in demand. That said, it is encouraging that mortgage approvals saw a 6 th consecutive monthly increase in June, rising above 7,5. While this represented an increase of 7 relative to the record low in November 8, mortgage approvals still remain below their 6 peak. Mortgage approvals rising but net lending is falling Despite the rise in the number of mortgage approvals, net lending to individuals in June was weaker than at any time over the last years. Households only borrowed 1m more than they repaid. This represents a fall of over 9% over the year and marks a major change from the average of 1bn in monthly net borrowing in recent years. The sharp fall is largely due to the weaker housing market. But it is clear that homeowners are also looking at paying down their outstanding debt. With 1,58bn in outstanding borrowing, most of which is property related, households are amongst the most highly leveraged in the world. Mortgage Approvals & House Price Growth Net Lending to Individuals m 1 Net Lending m Left Hand Scale Change Right Hand Scale Source: Bank of England 5 CPI inflation projection based on constant nominal interest rates at. and 175 billion QE Inflation hits MPC target in years time Source: BoE s % Growth 1 5 Source: BoE, Nationwide Building Society Mortgage approvals LHS House Price Growth RHS Long-Run Approvals - Jan- Jul- Jan-5 Jul-5 Jan-6 Jul-6 Jan-7 Jul-7 Jan-8 Jul-8 Jan-9 Jul-9 Jun-6 Dec-6 Jun-7 Dec-7 Jun-8 Dec-8 Jun-9 % % % -% -% -8% -1% Foreign lending has been and gone reducing funds for businesses A key feature of the credit crunch has been the reduced availability of credit to businesses. According to the BoE s Credit Conditions survey, credit availability to corporates fell from the onset of the credit crunch in Q 7 to Q 8. However, the latest survey for Q 9 signalled that lenders have increased their availability of credit to businesses. The latest increase follows a more modest rise in. lenders expected to increase credit availability further in Q. While lenders are reporting increased credit availability it is clear that the flow of net lending to businesses is declining. Indeed, in May businesses repaid more debt than was lent to them, most notably to foreign lenders. As a result, the net flow of lending was negative (-.bn). This compares to an average of 7bn per month in 7. During the credit boom foreign lenders were a key source of funds to businesses. However, some of these (e.g. Icelandic banks) have exited the market. As a result, businesses will be more reliant on a reduced pool of funds from lenders. % Points % % 1 1% % Surge in Foreign Lending During Boom Lending to Businesses Contributions to Growth Source: Bank of England - Major lenders Foreign lenders Other lenders -1% Jan-7 Apr-7 Jul-7 Oct-7 Jan-8 Apr-8 Jul-8 Oct-8 Jan-9 Apr-9

6 II ECONOMIC GROWTH PERFORMANCE AND PROSPECTS 6 PMIs suggest s private sector is lagging behind the Unlike the and RoI economies, no quarterly GDP statistics are available for to provide a timely indicator of economic growth. Indeed, s Gross Value Added (GVA) statistics, which equate to regional GDP, for 8 will not be available until December 9. Despite this considerable lag in official economic growth data, there are a number of sources that provide an indication of private sector output. The most timely indicators are the Purchasing Managers Indices or PMIs. The PMIs have consistently highlighted that since the onset of the credit crunch, s private sector went into the recession before the. Furthermore, the fall in output, to date has been more severe in. In recent months, both economies have seen a significant improvement in private sector activity. For the, the private sector has recorded consecutive months of output growth to July. Private Sector Output Index confirms s steeper falls to date Alongside the PMI, Ulster Bank has developed a Private Sector Output (PSO) Index for. This is a single output index incorporating the indices of production, services and construction. The PMI and the PSO index have a reasonably strong correlation (see Appendix I). We have also replicated the index for the, which has a strong correlation with the official GDP statistics. Both the Ulster Bank PMI and the UB PSO indices highlight that has experienced a sharper decline in output to date. In 8, s PSO index fell by % over the year as opposed to a rise of. for the. Looking at the latest quarter period to 9, recorded an annual average contraction of.9%. This compared with a 1. decline for the. But experienced sharper falls than in Q 8 & 9 According to the UB PSO indices, has experienced seven consecutive quarters of declining private sector activity up to 9. This has brought a cumulative decline of since Q 7. However, it is noted that the pace of decline has eased each quarter since Q 8 whereas in the the declines have intensified. is expected to record a further, but more modest quarterly contraction, in Q 9. Thereafter, private sector output growth should resume later in the year, possibly as early as Q. Meanwhile, the PSO index has declined over the last quarters, bringinging a cumulative fall of 5.%. During the last two quarters, Q &, s private sector output declined at a much steeper rate than its equivalent. In 9, the PSO index fell by., which was well above the 1% decline recorded by. The official GDP figures signalled a 5 th successive contraction in Q 9 which would takes the cumulative fall from the 8 peak to 5.7%. All the sectors are contributing to s fall in private sector output What is clear from the chart opposite is that the slowdown beginning in H 7 was driven by the service and construction sectors. These in turn were triggered by the slump in the property market. However, these property-related sectors cannot and will not keep falling for ever and there is evidence later in this report of a tentative recovery. As a result, these property sectors within the construction and services industries will stop acting as a drag on output growth in the coming quarters. Since Q 8, all of s main private sectors are contracting relative to the same period one year previously. The production industries, predominantly manufacturing, has witnessed significant declines since the collapse in global trade in Q 8. The production industries accounted for threequarters of the quarterly decline in private sector output in Iraq War II Private Sector Business Activity (PMI) No Change Increasing rate of growth 5 denotes no change Increasing rate of decline Source: Markit Economics & Ulster Bank PMI Aug- Aug- Aug- Aug-5 Aug-6 Aug-7 Aug-8 Aug-9 % % Q/Q % % % 1% % -1% PSO v Private Sector Output Index Annual Average Growth 6 Source: UB & Private Sector Output Indices - Annual Growth 7.%.8% % +. 9* -.9% -1. * Annual growth up to 9-6 Q Q 5 Q 6 6 Q 7 Q 8 Q 9 v Private Sector Output Index Quarterly Growth PSO Source: UB & Private Sector Output Indices Annual Growth 7.%.8% 8 -.% +. 9* -.9% -1. * Annual growth up to 9 - Q Q 5 Q 6 6 Q 7 Q 8 Q 9 Contribution to Private Sector Output Growth Quarterly Growth Source: UB PSO Composite Index -% Services Production Construction -%

7 And all sectors are contributing to the decline in employment Ultimately, falling output leads to falling employment. The level and growth of salaried employment is an important determinant of overall economic growth and output. The sharp fall in private sector output is increasingly being felt in the labour market. All sectors of the economy are contributing to s overall job losses. According to the latest Quarterly Employment Survey, the number of jobs in 9 fell by over 19, relative to 8. This represented a fall of. which was steeper than the 1.9% decline experienced by. The construction sector has recorded the steepest declines to date, plunging some 1.8% over the year (=+.). The manufacturing sector has experienced falling employment for the last quarters, shedding almost,66 jobs (-5. y/y). Despite these steep falls, s rate of decline compares favourably with the (-6. y/y). Meanwhile, both & the have recorded similar rates of job losses within the service sector (-1.%). The ongoing loss of service sector jobs is a major factor behind s sharp fall in economic growth. % % % -% -% -8% -1% -1% -1% & Employment Growth 9 Source: DETI & ONS Employee Jobs Services Manufacturing Construction Total 7 s service sector is in its most severe recession to date outperformed the in terms of sevice sector employment growth over the last decade, with employment rising by almost a quarter ( = +1). However, unlike during previous recessions, s service sector is shedding jobs at a similar rate to the. In 9, employment within the service sector fell by 1.% y/y which was in line with the decline (-1.)., like the, has now recorded three consecutive quarters of employment decline, a feat last witnessed during the early 198s. Indeed, is currently losing service sector jobs at its fastest rate on record. At 9, there were almost 1, fewer individuals employed within the service sector. This takes service sector employment back to mid-7 levels. While service sector output is set to increase in the coming quarters it will not be sufficient to sustain current employment levels. s service sector is expected to see employment return to 5 levels within the next 1-18mths. Clearly, s service sector is experiencing a more severe recession than in the early 198s. % % % -% -% v Service Sector Employment Growth Source: DETI & ONS, Employee Jobs Employment Growth* 1yr -1.% -1. 5yr 7.8%. 1yr.% 1.9% *for March each year experiencing sharpest fall in service sector jobs on record & to contract by % and. respectively in 9 It is clear from the GDP growth figures for Q 8 Q 9 that the recession was deeper than previously thought. In light of this, and despite the fact recent economic data has been stronger than expected, we have revised our forecast for 9 from -.% to -.. Growth of 1.% is anticipated in 1. Conversely, the news flow for has not caused any surprises and we still expect a contraction of % in 9 followed by growth of 1% in 1. The latter compares with an average growth rate of.% over the period In recent years, s economic prosperity was boosted by simultaneous booms on a number of fronts: a net inflow of migration, a property / housing boom, a public expenditure boom and the spillovers from the Celtic Tiger boom. All of these factors benefited more than other regions. However, the flipside of this is that these drivers of growth have either gone or are about to go into reverse in the next few years, as is the case with inward migration and public expenditure growth. Therefore, we expect the period ahead will be one of lower economic growth and higher unemployment. It is our view that s sustainable growth rate will be % per annum on average and we expect it to be below the average. Real Economic Growth (GVA) % Average Source: ONS, ONS GVA Deflators and UB Forecasts estimates & forecasts from 8 & for from f 9f 1f

8 III PROPERTY-RELATED SERVICE INDUSTRIES SHOWING SOME ENCOURAGING SIGNS 8 The pace of output declines in s service sector eases The latest Index of Services survey for 9, reported a decline in output for the 7 th consecutive quarter. The, on the other hand, has experienced just successive quarters of declining output. However, while the rate of service sector contraction is easing in, with just a modest quarterly fall of.% recorded in 9, the services sector experienced a larger drop of 1.%. That said, s service sector has experienced a sharper cumulative decline over the last 7 quarters with output falling by 5. and now back to levels last seen in 5. Meanwhile, the s service sector output is fractionally higher and is currently at mid-7 levels. s service sector is expected to return to growth in Q 9. However, activity remains at extremely weak levels and it is unlikely we will return to the mid-7 highs anytime soon. House price surveys report % decline from peak According to the DCLG, the average house price stood at 17,7 in Q 9. This represented a % y/y fall which was the steepest annual decline of all the regions ( = -1.%). This represents a 1% fall from the peak August 7. Meanwhile, other house price surveys have highlighted even sharper annual house price falls. The latest Nationwide survey for Q 9 has declined by % from the Q 7 peak while the University of Ulster house price survey, due next week, is expected to record a fall of % plus over the same period. The house price surveys continue to lag the re-pricing that has occurred in the market. We expect the average house price (using the UU or DCLG measures) will stabilise around 15k in early 1. This would represent a peak to trough correction. While house prices are often the primary focus of attention, from an economy perspective what is more important is activity. Rebound in mortgage activity as First-Time Buyer returns The Council of Mortgage Lenders captures the mortgage activity of the four main local banks. While this accounts for only a proportion of the total market it provides a useful indication of mortgage market activity. According to the CML s latest data, the number of mortgages rebounded off record lows in Q. There were, loans approved in Q, an increase of on the previous quarter. Clearly, the level of mortgage activity remains at subdued levels. Nevertheless, it is encouraging that activity is picking up particularly within the first-time buyer (FTB) market. There were 1,1 mortgage approvals in Q which amounted to of the overall mortgage market - its highest share of the market since Q. In addition, of these mortgage approvals were for properties valued at < 15k. This highlights the return of more affordable housing. Service sectors most exposed to property downturn return to growth The service sector slowdown has been most apparent in the Business Services & Finance (BSF) sector. To date, the decline in output has mirrored the downturn in the property market. Given that there has been an upturn in housing sales and transactions, albeit from extremely low levels, it is not surprising that the BSF sector has recorded output growth. The last two quarters up to 9 have each posted output growth of 1.%. Despite this growth, the current levels of activity are 9% below the 7 Q peak, which is back to late 5 levels. In our view s BSF sector will continue to recover but it will take roughly five years to regain this loss in output. As Mervyn King highlighted this week, levels of activity are more important than growth rates. The low levels of activity have not been sufficient to stave off job losses. Employment within this sector, a priority growth area of the Executive, has fallen by. y/y in 9. Q/Q % % % 1% % -1% -% % ,5,,5,,5, 1,5 1, 5 - % 1 1% % - -1% & Service Sector Output Index of Services 5 5 Q 6 6 Q 7 7 Q 8 8 Q 9 average house price below average Source: DETI & ONS Annual Growth % 1. 9* -.%.% * Last Quarters to 9 Northern Ireland First-Time Buyer Mortgages Q Q Q 5 Source: CML Q 6 Q 7 Q 8 Business Sevices & Finance Output Source: DETI Index of Services Annual House Price Inflation Source: DCLG & permanent tsb / ESRI RoI average house price at peak Aug 7-5k 1% above average - Jan-6 Jul-6 Jan-7 Jul-7 Jan-8 Jul-8 Jan-9 Jul-9 Q Q/Q

9 IV CONSUMER SENSITIVE SECTORS REMAIN WEAK AND FACE A CHALLENGING TIME AHEAD 9 But downturn in consumer sensitive sectors continues Output in the consumer sensitive sectors (which includes retail & wholesale distribution; and hotels & restaurants) has fallen for the last seven consecutive quarters to 9. However, the pace of decline has eased markedly with the most recent decline just.1% relative to a 1.7% drop in Q 8. Activity within these sectors, which account for of private sector services output, is now almost 9% lower than at the peak in Q 7. The Distribution sector returned to growth in (+1.1% q/q) following 6 successive quarterly declines. This growth was offset by a hefty 7. quarterly fall in activity within the Hotels & Restaurants sector. 8% % % -% - Consumer Sensitive Sectors* Output *Includes Wholesale & Retail Distribution, Hotels & Restaurants Source: DETI Index of Services & UB Calculations Q/Q -8% consumer sector downturn has been marked than the to date Alongside the public expenditure, inward migration and property booms in recent years, also experienced a consumer boom. Indeed, s consumer boom was more marked than the over the period 5-7. Similarly, the decrease in output has been greater with the experiencing a cumulative fall of.9% from its peak in 8, almost half the decline recorded by. Unlike the property related service sectors, we do not see the latest quarterly rise in Distribution output as a sign of a sustained recovery. Rising unemployment will put further pressure on the consumer sensitive sectors over the next 1-18mths. The boost from RoI shoppers is also expected to ease. A survey undertaken by the National Consumer Agency in June, shows supermarket food prices fell by as much as % since January due to price war in the RoI. % % % -% -% & Consumer Sensitive Sectors* Output Rolling Annual Average Growth *Includes Wholesale & Retail Distribution, Hotels & Restaurants Source: DETI & ONS Index of Services & UB Calculations Q 5 Q 6 Q 7 Q 9 Consumer demand for big ticket items continues to weaken After housing, the new car is the largest discretionary expenditure item. As such, new car sales are viewed as a barometer of the strength of the consumer. In 9 there were over 6, fewer new car sales (private sales only) relative to the same period in 8. This represents a fall of 1% y/y. Over the last four quarter period, up to q1 9, there were,5 private new car sales in. This represents a fall of over,, or one third, since the recent peak of 6,5 recorded in 7. This represents the lowest number of new car sales, over a four quarter period, since 199. However, the car driving population (> 17 yrs of age) has increased by 1% since then. So s new car sales, expressed as a proportion of the driving population have reached a record low. % % % 1% % -1% -% -% -% - Q 1 Q New Car Registrations Annual growth 6 -.% % 8-7.1% 9* -. Latest quarters Source: Driver & Vehicle Agency Q Q Q 5 Q 6 Q 7 Q 8 Q 9 Jobs in the consumer sensitive industries falling sharply With output in the consumer sensitive sectors now back to levels last seen in early 5, it is no surprise that employment has suffered. s consumer sensitive sectors (hotels & restaurants, wholesale & retail) have enjoyed superior employment growth, relative to the, over most of the last twenty years. Indeed, s employment within these sectors has increased by % during the decade. This compares favourably with a growth rate of under. Over the year to March 9, employment in the consumer demand industries has declined by.8%, which was in line with the. This pace of decline has not been seen since the early 198s. The consumer demand sectors are facing challenging times ahead. Rising unemployment, personal insolvencies and mortgage arrears will encourage consumers to rein in their expenditure and where possible save more. Over the next 1-18mths the prospect of higher taxes (including water charges & rates rises) will also hit disposable incomes. Employment within Consumer Sensitive Sectors (Includes Wholesale & Retail Distribution, Hotels & Restaurants) Change 1% 1% 8% % % % -% -% Employment Growth* 1yr -.8% -.7% 5yr 8.1% -.% 1yr.%. *for March each year Source: DETI & ONS, Employee Jobs

10 V MANUFACTURING OUTPUT FALLS AT RECORD RATE BUT GROWTH TO RESUME IN 9 H 1 experiences sharp fall in industrial output in 9 output within the production industries, which includes Manufacturing; Electricity, Gas and Water Supply; and Mining & Quarrying decreased by.% during the 9. The pace of decline has eased from the.8% fall experienced in Q 8 and the latest figures compare favourably with the quarterly decline of 5.% for the. Meanwhile, the level of production output in was some 9% lower in 9 relative to the same period a year ago. While this represents a very significant rate of decline, s performance compares favourably with the even sharper falls in other economies, notably Germany and the Eurozone. % Industrial Production Year-on-Year % Change Q Source: DETI, ONS & Bloomberg Germany Eurozone Manufacturing experienced its sharpest y/y decline on record manufacturing output recorded a quarterly decrease (-.7%) for the fourth consecutive quarter in 9. However, the latest figures represented an easing in the pace of decline relative to the 5.% fall in Q 8. Furthermore, the s manufacturing sector recorded a sharper drop in output than, with output falling by 5.1% over the quarter and 1. over the year. Despite the slower rate of decline in, manufacturing output was 1% below the corresponding level in 8. This represents the first time industry has recorded a double-digit year-on-year decline. While the pace of manufacturing output decline will ease in Q and return to growth from Q, the y/y decline in output in Q will exceed the record 1% y/y drop in. Overall manufacturing output is set to fall by 9% in 9 before rebounding in 1.. Pharmaceuticals bucks the trend of output declines All of s main manufacturing sub-sectors recorded output declines apart from the recession proof Chemical & Chemical Products (includes pharmaceuticals) sector. Meanwhile, the Food, Drink & Tobacco sector saw its 6 consecutive quarters of growth come to an end with a modest.% decline in 9. However, unlike most of the other sub-sectors, output within this sector remains at historically high levels. s food sector has been the major beneficiary from sterling s bout of weakness against the euro. Not surprisingly, the Engineering & Allied Industries sector recorded steep falls of 7.% q/q and 17.7% y/y in 9. A number of s flagship firms, such as Bombardier & FG Wilson, have been hit particularly badly. It should be remembered that one of s largest exporters, Seagate Limavady, ceased production in Q 8. The pharmaceuticals and food sectors are expected to be the best performers over the next year. Q/Q % Change % % % -% -% -8% % Change % - -1% -1 -% Manufacturing Output QoQ Left Hand Scale Source: DETI Y-o-Y Right Hand Scale % -5.% All Manufacturing Manufacturing Output by Sub-sector Quarterly Change -.% Food, Drink & Tobacco -. Leather, Textiles & Textile Products 1.% -5.1% -7.% % Change Q 8 9 Source: DETI Chemical & Chemical Products Basic Metals & Fabricated Metal Products Engineering & Allied Industries % 1 1% % - -1% % Total Other Manufacturing Manufacturing now losing jobs at a rapid rate A key theme in this QER is that returning to growth does not mean the recession in its widest sense is over. s manufacturing and production industries are going to return to output growth by Q at the latest. However, it is the level of output that is important not the growth rate. Manufacturing output is currently back at levels last seen 6 years ago. Returning to the levels of manufacturing activity at the peak in 8 will take several years and the majority of jobs lost in the sector, some,6 over the last year, are unlikely to return. There were 1,8 jobs lost in 9 alone which represented.% of the entire manufacturing employment base. Despite an upturn in global trade, the manufacturing sector will be vulnerable to further job losses in the coming quarters. It is apparent from the chart opposite that unlike the last recession in the early 199s, s manufacturing industry will contract broadly in line with the. v Manufacturing Employment Growth % % -% -9% -1% Source: DETI & ONS Employee Jobs

11 VI 11 CONSTRUCTION SLOWDOWN SET TO MOVE TO INFRASTRUCTURE / COMMERCIAL SECTORS GB Construction output declines at a sharper rate than s construction output recorded a 1.8% decline in output in 9 which was 5.% lower relative to 8. This represented the 7 th quarterly decline within the last nine quarters. s construction sector began contracting five quarters ahead of GB s construction sector. However, GB s construction sector has since seen output plummet since Q 8 and by considerably more than anticipated. Output within GB s construction sector fell by a hefty 9% in 9 which was 16.% below its recent peak in 8. By comparison, s construction sector has fallen by 1% from its peak in Q 6. In light of the rapid deterioration in GB construction output, job losses in this sector are likely to accelerate at a faster rate than in the coming quarters. experiences nd consecutive quarterly rise in housing output In 9, housing output rose for the second consecutive quarter, however, this is coming off record lows. Housing output increased by 1.9% q/q but is still % below the peak in q1 7. Infrastructure output (sewerage, roads etc) was broadly flat in (+.% q/q) but up.8% y/y. Meanwhile, the Other Work category (schools, health and commercial) recorded a sizeable quarterly fall of 5.% in 9. This followed a 7.% decline in q 8. The commercial property sector is playing catch up with the residential sector and while the latter has seen a bottoming out of activity the former will experience a challenging year ahead. Rising unemployment will continue to put pressure on consumer sensitive sectors which in turn will impact on the fortunes of the commercial property sector. Finally, Repair & Maintenance (housing / roads etc) output has fallen 9% since its q 7 peak. The squeeze on public finances is taking its toll on this category and this trend should continue. 1 1% % - -1% -1 1 Q/Q % 1 1% % - -1% -1 Q Q Construction Output Q Q/Q Q 5 Source: DFP Construction Bulletin Q 6 Construction Output Quarterly Growth Q 7 Q 8 Housing Infrastructure Repair & Maintenance Other Work Source: DFP Construction Bulletin 8 8 Q 8 Q 8 Q 9 Q 9 Infrastructure output / capital investment has peaked and will fall Last month, the DFP Minister confirmed that 8/9 was a record year for capital investment (capex) - 1,67m. In recent years, the surge in capex has led to a significant rise in infrastructure output. However, this is unlikely to continue. s capex as a proportion of total public expenditure has average more than 1% over the last years a new high. This is in line with the average. However, for to address its legacy of under-investment it must invest a significantly higher proportion of public expenditure in capex relative to the over the longer-term. But, given the deteriorating fiscal environment, post 11, this looks unrealistic. In our view, s capex has peaked. The Executive s planned capex for 9/1 ( 1,66m) is slightly below the 8/9 outturn and outturns normally undershoot planned investment. More importantly, almost of the.7bn capital investment for the next years is dependent on capital receipts / asset sales. These pre-recession projections are now unlikely to be met and the Executive s original capex plans up to have become obsolete. The scale of the post-11 capex cuts will only become clear after the next Comprehensive Spending Review. M Executive's Capital Investment Outturn Capex reliant on capital receipts / asset sales Will Capex be hit by anticipated public expenditure cuts from 11 onwards? Source: DFP / /5 5/6 6/7 7/8 8/9 9/1 1/11 11/1 1/1? experiencing steeper job losses than the as a whole In, the construction sector continues to bear the brunt of the job losses in percentage terms. In 9, the number of employee jobs recorded a quarterly decline of 1,5 jobs or -.7% (= +1.1%) to 9,. This represents a fall of 5,78 (-1.9%) over the year whereas the still recorded growth of. on the same period. To date, the has not witnessed a significant decline in construction employment. However, given the steep fall in output in 9, job losses in the s construction sector will become more apparent later in the year. Nevertheless, the is not expected to experience a construction downturn on the same scale as. s construction employment has fallen back to 5 levels and these figures exclude the self employed. As a result, they vastly underestimate the job losses and underemployment in s construction industry. & Construction Employment Growth % Employment Growth* % 1yr -1.9%. 5yr 6.% 1. 1yr 7.%. *for March each year 1% % -1% -% Source: DETI & ONS, Employee Jobs -%

12 VII LABOUR MARKET UPDATE 1 experiences a steep decline in employment The latest Labour Force Survey (LFS) for the period 9, has employment (individuals in employment not jobs) estimated at 7,. This represents a quarterly fall of 1, and a decline of, (-5.) relative to the same period last year. This compared with a fall of 1.9% for the. Meanwhile, the LFS estimates that s unemployment rate for 9 is 6.7%, which remains below the rate of 7.8%. s unemployment rate is set to rise above 8% before the end of the year and is forecast to average 9% in 1. This compares favourably with forecasts for the (1.) and the RoI (1). While s ILO unemployment rate has been consistently below the rate since Jun- Aug 5. We anticipate s unemployment rate will revert back below the s within the next - years. Full-Time jobs are being lost at a more rapid rate than part-time jobs The latest seasonally adjusted employee jobs figures for March () have confirmed the third successive quarterly contraction in employee jobs. The 9 seasonally adjusted employee job figure stood at 715,5. This represents a 5, fall (-.9%) over the quarter and a decline of 19,6 (-.) on 8. This represents a sharper decline than in the (-1.9%). has not witnessed an employment decline of this scale since its last recession in It is also noted that the job losses are affecting full-time (FT) employees more than part-time (PT). s FT employee jobs have fallen by.7% over the year to 9, as opposed to just. for PT employee jobs. The employee jobs figure is set to hit 69, by the end of 9, a level not seen since. An even sharper fall will be apparent within s 1k self-employed (at June 8) which are expected to record a decline of around 15, (1%) in 9 from this level. The rate of increase in unemployment has finally eased The number of unemployed claimants rose by 5, in Q 9 following a rise of 7, in the previous quarter. A further 1,5 were added to the register in July bringing the total number of individuals claiming unemployment benefit to 51, - a level not seen since June This represents a cumulative increase of,9 over the last 1 months, an annual rise not experienced since July s claimant count has now more than doubled since its record low of,5 in November 7 and February 8. Despite the surge in unemployment, the rate of job losses has eased with the monthly rise averaging 1,6 over the months to July, as compared to the peak of over,5 in the months to January 9. Employment falling & unemployment on the rise Nos (s) ILO Rate 85 1% Total in Employment(Left Hand Scale) ILO Unemployment Rate (Right Hand Scale) 8 1% 75 Record high Mar-May 8 1% 795, 7 8% 65 6 % 55 Record low May- Source: DETI Jul 7.% 5 % Mar-May 199 Oct-Dec 1996 Nov-Jan 1999 Dec-Feb 1 Jan-Mar Feb-Apr 5 Mar-May 7 9 Employment - Full-Time, Part-Time and Total 8% 8% FT PT Total % % % % % % -% -% -% -% Source: DETI Quarterly Employment Survey Jun-96 Jun-97 Jun-98 Jun-99 Jun- Jun-1 Jun- Jun- Jun- Jun-5 Jun-6 Jun-7 Jun-8 Jun-9 Claimant Count Month Moving Average Dec 198 Jan 9 + +, Source: DETI -5 Jan-71 Jul-7 Jan-78 Jul-81 Jan-85 Jul-88 Jan-9 Jul-95 Jan-99 Jul- Jan-6 Jul-9 Rate of job losses eases within the construction / property sectors At the end of June, just over 1,5 individuals formerly employed within the construction / property sector were claiming unemployment benefit. This represented an increase of 1 (7,5) relative to June 8. However, these figures vastly understate the extent of the job losses to date. Both migrant workers and some indigenous workers will have left the labour market altogether, while others may have found low-paid employment outside of construction. It is encouraging to note that the rate of job losses within the construction / property sector has eased markedly since the start of the year when there were over 1, construction / property related workers joining the unemployment register each month. Over the months to June, just over additional claimants were added each month on average, with only 5 added in June Construction & Property Related Unemployment Construction / Property Related Unemployment (LHS) Month Moving Average Change (RHS) Source: ONS Claimant Count & UB Estimates Jan-7 May-7 Sep-7 Jan-8 May-8 Sep-8 Jan-9 May-9 1,5 1,5 1,

13 Stimulating the construction sector will have more impact in The property downturn in, which has been more marked than in any other region, triggered a sharp rise in joblessness for individuals with occupations linked directly to the construction / property sector. A variety of occupations straddling the manufacturing, service and construction sectors have been directly affected including: architects, civil engineers, plumbers, joiners, electricians, builders, quantity surveyors, brick layers, labourers and estate agents. Earlier this year, close to % of s unemployed could be identified as coming directly from construction / property related occupations. This compares with a peak of 17. for the as a whole. However, in reality, the figure would be larger than this as other occupations such as legal, retail & wholesale (builders suppliers) have also been affected. Clearly, the most effective weapon in the Executive s armoury to stem the rise in unemployment would be to stimulate the construction sector. This would also have a significant multiplier effect on the consumer sensitive sectors of the economy. But unemployment will continue to rise well into 1 Nevertheless, the number of unemployed is set to reach 65, by mid- 1. This would bring the cumulative rise in the claimant count to 1,5 since the record lows were last achieved. This suggests that almost two thirds of the anticipated rise in unemployment, since the downturn began has already occurred. s claimant count unemployment rate, as a proportion of the workforce, stood at 5.9% in July 9. This compares unfavourably with a rate of.9% and is the joint-third highest unemployment rate of all the regions. During the last 1 months, s claimant count has risen by.8 percentage points (pp) which compares to an increase of. pp for the. While we anticipate the level of unemployment and the rate will fall back slightly late in 1, it will remain at early 1 levels (6,) for some time. With the 18-yr age group being hit the hardest The key age-group bearing the brunt of the rise in unemployment is the 18-yr age-bracket. s unemployment rate (ILO) within this cohort has more than doubled since its 6.9% low in Feb-Apr 7. The current rate of 17. for the period 9 is above the comparable rate of 17.% and over 11 percentage points higher than the unemployment rate for all those over 16yrs of age. While we do not anticipate that s unemployment rate will hit the peak of 1.8% in 199, s youth unemployment rate is expected to hit the.1% peak recorded in Dec- Feb 199. A growing concern is that the first experience of the labour market for an increasing number of the youth population is unemployment. Furthermore, competition for employment from migrant labour is more intense now than was the case in the early 199s. records the sharpest rise in economic inactivity over the last year The fact that s headline ILO unemployment rate compares favourably with the wrongly suggests that the level of joblessness in is not as bad as the. However, the claimant count measure, highlighted earlier, suggests otherwise. In addition, has experienced the sharpest rise in the numbers of economically inactive of all the regions over the last 1 months. Over the last year, s economic inactivity rate - which measures the proportion of the workforce neither in work or looking for work - has surged by.8 percentage points. Conversely, the s comparable rate remained unchanged. s current economic inactivity rate ( 9) of 9. is currently the highest of all the regions (=1%). It is set to push higher in the months ahead and will shortly surpass the previous record high of.% (Dec 9 Feb 95). % % 1 1% 1, 1, 1, 8, 6,, Claimant Count Levels Assembly Launched Mid-1 Peak of 65, July 9 51, Forecasts Record low,5, Nov 7 & Feb 8 Source: DETI & UB Forecasts Jul-8 Jul-8 Jul-86 Jul-89 Jul-9 Jul-95 Jul-98 Jul-1 Jul- Jul-7 Jul-1 ILO Rate % 1 1% % % Point Change.8 Estimated Share of Unemployment Directly Linked to Property / Construction 19.% Source: DETI, LFS Scotland Wales Source: ONS Claimant Count & UB Estimates % Jan-5 May-5 Sep-5 Jan-6 May-6 Sep-6 Jan-7 May-7 Sep-7 Jan-8 May-8 Sep-8 Jan-9 May-9 Unemployment Rate by Age April-June Each Year (199-9 Mar-May) 18-yrs 5-9yrs 16+ Annual Change in Economic Inactivity Rate April-June 9.1 Source: ONS LFS, Working Age Economic Inactivity Rate NE Lon Wal SE Scot Y&H SW NW EM East WM