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Economic EyeWinter forecast2013

EY Economic Eye Winter Forecast 2013 2

About EY Economic EyeFor brief technical notes on the EY Economic Eye forecasting model and previous reports, please refer to earlier EY Economic Eye publications on www.ey.com/ie/economiceye.


Executive summary ................................................................................ 1‘Green shoots’ of recovery finally appearing in the domestic All-Island economy .....................................................................1… but a bumpy recovery in output .......................................................................................................................................1All-Island economy lagging the UK ......................................................................................................................................2The export opportunity and challenge – getting the balance right ..........................................................................................2Is it too soon to ‘celebrate’ – how sustainable is the recovery? ...............................................................................................3A reminder of the long-term challenge – 300,000 jobs needed ...............................................................................................4… exports and FDI have an important role to play but all sectors need to drive the jobs recovery .............................................4

Introduction ............................................................................................ 5

Chapter 1 ............................................................................................... 71.1 Turnaround at last in the domestic labour and housing markets ................................................................................71.2 Output growing but a bumpy recovery ....................................................................................................................111.3 How sustainable is the recovery? ...........................................................................................................................13

Chapter 2 ............................................................................................. 192.1 Sizing the global trade opportunity ........................................................................................................................192.2 Island’s recent and current export and Foreign Direct Investment performance ........................................................222.2.1 Exports ................................................................................................................................................................222.2.2 Foreign Direct Investment .....................................................................................................................................272.3 Exporting to emerging markets easier said than done .............................................................................................272.4 New markets should be pursued but alongside existing market strengths ................................................................272.5 Still a 300,000 job challenge for the Island – how much can export and FDI sectors contribute to this target? ..........27

Chapter 3 ............................................................................................. 293.1 ROI risk monitor....................................................................................................................................................293.2 NI risk monitor ......................................................................................................................................................30

Annexes ............................................................................................... 31

Contents


Executive summary

‘Green shoots’ of recovery finally appearing in the domestic All-Island economyFour and a half years after its launch in Spring 2009, the Winter 2013 Economic Eye – the 10th in the series – can finally report 'green shoots' of recovery in the All-Island domestic economy. The key aspect of this recovery relates to domestic economic growth, not GDP growth related to strong export performance. The last 10 Economic Eye reports have consistently highlighted weak domestic demand, which has been a major drag on economic growth across the island.

Since 2008 the All-Island economy has been buoyed up by exports, which have made a sizable contribution to GDP, but less to employment and household incomes. It was always going to require a turnaround in the domestic economy – as has already occurred in the UK – to put the Island recovery on a solid footing. Even during the Celtic Tiger years, when exports and FDI often grabbed the headlines, it was activity in the domestic sectors which had the biggest impact on citizens in all parts of the country, particularly in terms of jobs.

The labour market, in both the north and south, has been relatively stable for several quarters, as major job-losses ceased and unemployment levelled off. In the first phase of labour market recovery, the number of part-time jobs increased, even as the number of full-time jobs continued to fall. Job creation was confined to a few sectors, such as health, professional services and IT, while most other sectors continued to shrink.

Over the last 12 months, the labour market recovery has entered a second phase. Employment levels have risen, including the number of full-time jobs. The jobs recovery is also becoming more broad-based, extending to sectors such as manufacturing, hospitality and other services, while retail is also showing signs of a turnaround. Agriculture has also made a sizable contribution to jobs growth in the Republic of Ireland (ROI) but job levels in this sector should be examined for seasonal changes. The only sectors that have shed jobs across the Island over the last year are the construction, financial services and public administration sectors, all of which are affected by specific factors.

The housing market on both parts of the Island appears to have reached a floor, or to have undershot its fair value. There are signs of modest price increases in ROI, driven by the Dublin property market. In Northern Ireland (NI), the level of housing activity has recovered from its recent lows. This has helped the banks’ trading fortunes by reducing the requirement for mortgage write-downs. However, the lack of repossessions in ROI, despite the high incidence of mortgage arrears, combined with the slow pace of dealing with non-performing loans, remains a risk for jobs in the financial sector and the wider economy.

ROI’s pending exit from its Troika bailout programme – the first of the troubled Eurozone economies to do so – is a further confirmation of the improvement in fortunes.

… but a bumpy recovery in output Despite this good news in the domestic economy, and improving sentiment, not all economic indicators are heading in the right direction. GDP has contracted in four of the last six quarters in ROI. The projected GDP increase in the second quarter of 2013 was also below expectations. The data in the NI Purchasing Managers’ Index (PMI) is positive, but nevertheless, the DETI’s Composite Index has fallen in two of the last five quarters, and the index value is still lower than in the same quarter last year.

As a result of a weak economic performance in the first quarter of 2013, combined with a disappointing manufacturing export performance, the Winter 2013 Economic Eye GDP forecast has been downgraded to -0.2% for ROI. This is marginally below the Department of Finance forecast. Gross National Product (GNP) performance is much more positive, to be +2.2% for 2013. This shows the importance of looking across a range of indicators and – for ROI especially – looking at both the GDP and GNP indexes. The main report explains the difference between GDP and GNP and reasons for divergence in growth rates in ROI, which are linked to multinational corporation profit repatriation and other international transfer flows. NI’s GVA forecast has been revised up to 1.0% in 2013, although NI lags the United Kingdom's growth of 1.4%. NI’s upgrade is because of an improving labour market and stronger than expected growth across the United Kingdom (UK).

Executive summary


All-Island economy lagging the UK The uneven recovery in economic output across the Island is normal for the early stages of a recovery cycle, which lags more than two years behind that of Great Britain. At a similar stage in 2010 and early 2011, GDP growth for the UK fluctuated between positive and negative, prompting doubt as to whether the recovery was actually underway. However, the recovery in unemployment was definitely underway across the UK and this trend has continued since.

A notable feature of the UK recovery - which is starting to be replicated across the Island of Ireland as the domestic economy recovers - was falling productivity. Jobs growth was higher than expected, given the slow growth in output. For the Island economy, this can be explained as a manifestation of the rebalancing of growth from the higher productivity export sectors, to the lower productivity and more labour-intensive domestic sectors. As an illustration, this could mean that there were fewer highly-paid business consulting jobs, but more low-paid retail jobs, which would result in lower output, but higher employment.

The export opportunity and challenge – getting the balance right As the domestic economy begins to recover, export growth has slowed in ROI, although it has held up well in NI. A slowdown in ROI exports had been forecast by the Economic Eye, which identified the need for a counterbalancing recovery of the domestic economy.

Real export growth in ROI has fallen from 6.4% and 5.3% in 2010 and 2011 respectively, to 1.6% in 2012, with forecast export growth of only 0.6% in 2013. This is partly as a result of weak global conditions and the disappointing pace of global economic recovery. The export of goods from ROI to weaker-performing countries such as France and Spain have fallen, but have risen to the US and Germany, whose economies are much stronger. It is also partly a result of product-specific factors such as the 'patent cliff', which is explained in the main report. The 'patent cliff' is a key factor behind a large drop in pharmaceutical exports, one of ROI’s largest export sectors. This is offset by a corresponding drop in imports, due to reduced need for intellectual property royalty imports.

Despite the recent slowdown, export growth is still a key pillar for long-term growth, with a particular emphasis on emerging markets. The Winter 2013 Economic Eye report highlights, there is a need to strike a balance between more traditional sources of export success, and potential new sources.

While not set to grow as fast as China or India, the US will still be the world’s largest import market in ten years time and Great Britain will also remain a key market. The Island’s export economy will still have strong trade links to the US, Great Britain and continental Europe. Links of such strength will be very hard to match in emerging economies, even in the long-run. In terms of both products and services, the Island has clear export specialisations, such as pharmaceuticals, organic chemicals and computer and business services in ROI, and agri-food in NI . These specialisations are likely to remain dominant for the foreseeable future.

But this does not mean that the Island should not be looking to trade with, or seek Foreign Direct Investment (FDI) links with emerging markets. It remains important to diversify export destinations and products, to tap high-growth potential markets, and to diversify sources of FDI. The forecast strengthening of the Chinese Yuan, combined with trends like the rising middle class, ageing populations, changing consumer tastes and increasingly sophisticated economies, all bring new, exciting opportunities for business which should not be ignored. However businesses need to recognise the high-risk/high-return proposition of emerging export markets, while continuing to focus on traditional export markets to overcome obstacles such as language, culture, currency volatility, trade barriers, regulation and intellectual property issues.


Is it too soon to ‘celebrate’ – how sustainable is the recovery?The ‘green shoots’ of recovery in the domestic economy are extremely welcome. But it is important to ask how sustainable the current recovery is.

For ROI, there are still significant risks in the short to medium-term. Consumer spending will be constrained by high household debt, muted wage growth, continued emigration and the risk of tougher personal bankruptcy legislation, combined with a rise in home repossessions. The recent budget may not have made consumers worse off, but contained little that would make them better off. While the budget fiscal adjustment was €2.5 billion, as opposed to an earlier-planned €3.1 billion, it was still an austerity budget and the effects and measures of previous austerity budgets will be felt in the coming years. Investment will continue to depend on the recovery of the financial sector, while the excess supply of housing will limit the pace of recovery in construction. Weaker growth in exports is predicted in the near-term until the global economy recovers fully. Specific sector trade prospects are subject to factors such as the 'patent cliff', which could have a disproportionately large impact on overall export performance.

For NI, the greatest risks are probably further into the future, which risks breeding some complacency as the economic figures improve. By the time NI faces these risks, ROI should have addressed many of its challenges. NI’s biggest economic challenges remain its dependence on public spending, over which Stormont has little control, compounded by the small size of its private sector and export base. What many people do not realise is that the UK and NI have yet to experience fiscal austerity to the same extent as ROI over the past five years, notwithstanding high inflation which has made fiscal cuts or freezes feel tougher. Another parliament of even tougher austerity is on the horizon. Unless there is a shift in the austerity versus stimulus debate in the UK – drawing on lessons from other countries – or a new government in Westminster at the next elections, NI’s economic recovery will be extremely vulnerable to more and tougher austerity. Unlike ROI, NI will not be able to export its way out of recession. With the exception of the agri-food sector – in which NI has considerable export strength - NI lags far behind ROI in terms of the scale of its export base – from pharmaceuticals to IT, tourism to financial services – and in terms of its footprint in key export markets outside Great Britain.


A reminder of the long-term challenge – 300,000 jobs neededAs most Economic Eye reports have concluded, the long-term economic goal for the Island is to create 300,000 net new jobs by 2020 in order to get unemployment rates back to pre-recession levels. This is less than the approximate 400,000 jobs lost over recent years, since a combination of emigration and an increase in inactivity rates have reduced the supply of labour.

To put the 300,000 job target in context, this is almost twice the number of jobs forecast to be created in the baseline Economic Eye Winter 2013 scenario. While the Island labour market has started to improve, total employment has only risen by 30,000 in the last 18 months, with many of these jobs created in the agricultural sector in ROI, which could be subject to revision or seasonal adjustment.

… exports and FDI have an important role to play but all sectors need to drive the jobs recoveryExports and FDI, combined with a strengthening domestic economy, will be key drivers of economic recovery across the Island. But there is a limit to the job creation potential of exports and FDI. All domestic and international sectors of the economy – from agriculture to manufacturing, construction to energy, retail to tourism, IT to professional services, and eventually again the wider public sector – will have to step up and make sizable contributions to the Island’s jobs target.

Both governments need to understand what drives or hinders growth in each of these sectors. They need to understand where the growth opportunities are, including those in the less prestigious and lower productivity parts of the economy. They need to understand what the sector risks are, and the inter-linkages between sectors. They then need to relentlessly support this understanding with targeted spending, tax and policy measures, to support this 300,000 jobs recovery.

In recent years there has been an understandable focus on meeting the terms of the bailout in ROI, which has involved cuts more than stimulus. There has also been an emphasis on achieving administrative efficiency savings and dealing with political stability issues in NI. This focus is shifting, highlighted by some of ROI’s modest budget support measures for the domestic economy, but so much remains to be done.

The Winter 2013 Economic Eye has identified the phenomenon of ‘Abenomics,’ Japan’s home-grown and radical alternative to austerity. This has started to revive the world’s second-largest but previously stagnating economy. It is against this new type of benchmark that governments north and south should be judged for their economic policy. With ROI emerging from the shackles of the Troika bailout programme, and all roads pointing to greater devolution in the UK, there can be few excuses preventing the Island from retaking full responsibility for its own economic destiny.


IntroductionIntroduction

Four and a half years from the first Economic Eye report in Spring 2009 – with ROI on the brink of being the first country to successfully exit its bailout programme and makes its long awaited return to financial markets – the 10th Winter 2013 Economic Eye report finally reports 'green shoots' of recovery in the domestic economy, notably in the labour and housing markets.

Weak domestic demand, as Economic Eye reports have consistently highlighted, has been the main drag on growth. Exports have done their best to prop up the Island economy, in terms of GDP, but less successfully in terms of jobs.

This is in contrast to the series of bad news for the Island economy reported in all previous Economic Eye reports. Output contracted in four of the last five years; the spectacular bursting of the housing market bubble resulted in large price falls for five consecutive years; the ROI government and its banks were the first of the troubled Eurozone economies forced to take an emergency bailout after going bust at the end of 2010; and most painful of all for people on the Island, the economy lost almost 400,000 jobs. Despite strong export performance, domestic demand was extremely weak as sectors like construction and retail suffered heavily.

While it is GDP or GNP growth figures which determine whether the recovery is 'official', the Winter 2013 Economic Eye highlights the recent improvements in the domestic labour and housing markets as the most compelling evidence to date of recovering domestic demand. It is this domestic improvement, much more so than high growth in one or two high-value export sectors, that will mostly directly benefit citizens via job opportunities and reduced housing negative equity, and start to make the recovery feel 'real' across the Island.

The first chapter of the Winter 2013 Economic Eye asks: does the turnaround in the domestic labour and housing markets – while extremely welcome – mean that the All-Island economy is finally on the firm road to recovery? Or will the recovery be bumpy and could it run out of steam? The responses offer a mix of optimism and caution.

The Summer 2013 Economic Eye looked at the role consumers will play in the Island’s economic recovery. The second chapter of the Winter 2013 Economic Eye examines the role of exports and FDI in the recovery, assessing how businesses and governments should approach and balance the twin opportunities presented by existing, traditional markets and sectors, versus new, fast growing emerging markets.

The third and final chapter concludes with the Economic Eye’s regular risk monitor assessment for business, identifying the top risks facing each of ROI and NI economies separately, and whether the scale of risk has increased or decreased in the past six months since the summer 2013 report. This aims to assist businesses to assess, manage and mitigate risks.


The 10th Winter 2013 Economic Eye report finally reports 'green shoots' of recovery in the All-Island domestic economy. Exports have done their best to prop up the Island economy and have made a sizable contribution to GDP, but much less so to employment and household incomes. It was always going to take a turnaround in the domestic economy to truly put the Island recovery on a solid footing.


Chapter 1Chapter 1

Is the All-Island economy finally on the road to recovery?

1.1 Turnaround at last in the domestic labour and housing markets Following close to 400,000 net job losses since the Island economy first went into recession, the anticipated bottoming out in and stabilisation of the labour market across the Island now appears to be firmly established. The data also points to a growing jobs market, including for full-time jobs, even as output data remains volatile (see section 1.2).

For ROI, the worst of its job losses occurred in 2008 and 2009, driven by the well-documented property-related construction redundancies. Since mid-2012, total employment has stabilised and actually risen in four of the last five quarters. The jobs recovery was led first by part-time jobs, which are now 15% higher than at the start of 2008; but more recently and most encouraging of all, by an increase in full-time job numbers.

Economic Eye appreciates the importance of distinguishing between part and full-time jobs growth because simply switching full-time for part-time jobs, leaving total employment levels unchanged, is not a true sign of labour market recovery. For example the issue of 'zero-hours' job contracts in the UK is a good illustration of this issue, demonstrating the trade-off between the flexibility these contracts offer to employers, versus the reduced job security for employees. It is also important to distinguish between a small number of high-value jobs, adding significantly more GDP, and larger numbers of low-productivity jobs which provide much needed employment.

Recent labour market trends in NI are almost identical to ROI: stabilisation of job losses in mid-2012 before a modest expansion in jobs, fuelled first by part-time jobs and, in the latest data, by a welcome upturn in full-time jobs.

Without wishing to subdue this good news, the Winter 2013 Economic Eye report does urge some caution. The recovery in the Island’s labour market is still at a very early stage and is significantly different to the recovery of the UK as whole where total employment is already above its pre-recession peak and, crucially, full-time jobs, which have been rising for three years, are almost back to peak. Full-time employment levels across the Island have only risen in a handful of recent quarters and are still around 20% and 10% below peak for ROI and NI respectively.

Fig 1.1ROI, NI and UK total employment

Index*2008 Q1 = 100

Source: CSO, NomisNote: NI and UK data refer to total workforce jobs (unadjusted) *Employment index

80

85

90

95

100

105

2008Q1 2009Q1 2010Q1 2011Q1 2012Q1 2013Q1

UK

NI

ROI The Island economy is between two and three years behind the UK labour market recovery. Because the Island recession was much more severe, recovery to peak employment levels will take considerably longer.


It is helpful to identify the role that productivity trends have played in the UK’s labour market recovery. Aggregate UK labour productivity is lower today than before the recession according to official data. UK employment has returned to its pre-recession peak before GDP. This has helped to avoid otherwise larger job losses and weaker job creation. In contrast ROI productivity has, until recently, held up remarkably well. This is likely linked to the sources and nature of output growth over the ensuing period in high value, low labour-intensive export sectors.

In both ROI and NI, assuming output growth does not exceed the forecasts, the labour market will not enjoy sustained growth unless productivity growth slows. The goal of any economy is rising employment numbers and rising productivity but given the choice of one, in the Island’s current economic situation, the attraction of rising jobs will trump productivity, for both citizens and politicians,. Indeed this productivity 'puzzle' may just be a feature of recovering domestic demand in lower productivity, more labour-intensive sectors. Thus we may expect to see this trend in the medium-term across the Island, before productivity growth returns to normal.

So what sectors have been driving the improving labour market across the Island? In the UK the jobs recovery has been broad-based across a wide range of sectors since the start of 2010 – a true sign of a healthy and robust labour market.

Improvements in the Island’s employment levels were initially concentrated in just a few sectors such as health, professional services and IT.

In ROI, health and social care employment has increased by 10,000 jobs since the first quarter of 2010. This shows how, even under austerity, demands on the health system from an ageing population make it very difficult to freeze staffing levels. However, easing recent population pressures from emigration do potentially call into question the efficiency and value for money of recent health recruitment. Other notable growth sectors have included information and communications, professional services and other services, the latter including activities like creative (e.g., film and television) and tourism-related sub-sectors. But the standout sector is agriculture, forestry and fishing with an estimated, and surprising, 23,000 job gains since the start of 2010. Employment in this sector is both seasonal and volatile and could easily be revised or adjusted down in subsequent data. This could significantly affect the overall employment picture. Falling employment in construction and public administration have been the main drags on the labour market, like in both NI and the UK, although the trends in the last year for construction employment are more positive.

Both NI and the UK have enjoyed net jobs growth in manufacturing since early 2010, suggesting that the much talked about rebalancing process may be partly underway. NI has also enjoyed jobs growth in information and communications, health and social care, professional services, other services and agriculture, forestry and fishing – like ROI – as well in administration and support services. This sectoral jobs pattern is consistent with recent inward investment successes that NI has attracted.

To put the labour market on a firmer road to recovery, losses in construction, retail, hospitality, transport and financial services needed to be stemmed and reversed. Positively according to the recent data, this more broad-based jobs recovery is starting to take hold. The jobs recovery is extending to sectors like hospitality and other services, while retail is also showing signs of a turnaround. The only sectors still shedding jobs across the Island over the last year were construction, financial services and public administration – all of which are affected by specific factors – and administrative and support services in ROI.

A notable feature of the UK recovery, which is starting to be replicated across the Island as the domestic economy recovers, was falling productivity. In ROI and NI, this is being driven by the rebalancing of growth from higher productivity export sectors, to lower productivity, more labour-intensive domestic sectors, which benefits a greater share of the population.


Turning to the once beleaguered housing market, which - along with the related construction sector - has been one of the unique negative features of the Island’s recession compared to the UK, there are signs that the worst is finally over. This is beginning to support an improvement in the profits of some banks as the effect of mortgage loss write-downs lessens. Following huge price falls of a third and almost a half for RoI and NI respectively, house price levels are now beginning to stabilise as the market reaches its ‘floor’ with the market having reached, or indeed fallen below, fair value.

ROI house prices nationally have posted modest growth in recent months. A closer examination of the data reveals house prices outside of Dublin, where the greatest excess supply of housing exists and economic conditions are more challenging, are still declining. In NI house prices are also levelling according to the University of Ulster house price index, while sales, new dwelling starts and completions have risen, albeit they are still well down on peak levels.

Change (000s) Growth (%)

ROI NI UK ROI NI UK

Agriculture, forestry and fishing 22.9 0.7 -39 28% 5% -16%

Industry 2.4 1.8 -14 1% 2% -1%

Construction -0.6 -2.2 -10 -1% -7% -1%

Services 20.9 7.8 457 1% 1% 2%

Distribution and retail 0.2 -0.1 1 0% 0% 0%

Transport and storage -4.2 0.1 21 -5% 0% 2%

Accommodation and food services 12.0 1.0 41 10% 2% 2%

Information and communications 1.9 0.7 48 2% 5% 4%

Financial services and real estate activities -2.1 -0.9 47 -2% -3% 3%

Professional, scientific and technical services 10.0 1.6 190 10% 7% 10%

Administration and support services -4.5 3.0 149 -7% 7% 7%

Public administration -4.4 -0.3 -20 -4% -1% -1%

Education 3.7 -0.1 -3 3% 0% 0%

Health and social care 5.0 2.9 26 2% 3% 1%

Other services 3.3 0.0 -43 3% 0% -3%

Table 1.1ROI, NI and UK sector employment performance (2012 Q1 - 2013 Q2)

Source: CSO, DETI, ONSIndustry = Manufacturing, mining and utilities All data are unadjusted NI and UK data refers to employee jobs, ROI data refers to paid employment and self-employment

Note: Table 1.1 based on seasonally unadjusted data to enable comparison across all three jurisdictions

Employment levels across the Island are rising, including crucially the number of full-time jobs. The jobs recovery is also becoming more broad-based across sectors, extending to sectors like manufacturing, hospitality and other services, while retail is also showing signs of a turnaround. The only sectors still shedding jobs over the last year are construction, financial services and public administration – all of which are affected by specific factors – and administrative and support services in ROI.


It will be a long time before home-owners who purchased at the peak of the respective booms – an admittedly small proportion of the overall home-owner population – will exit negative equity. House price levels in ROI and NI today respectively are back at levels from ten years ago in 2003 and 2004/05 respectively, and are forecast to grow more slowly than the UK over the next 15 years, with considerable downside risks to this outlook. For ROI the large overhang of excess housing supply and toughening stance towards mortgage arrears, have the potential to keep house price growth muted. In NI weak economic and income growth prospects, with a sustained period of austerity on the horizon, will likewise prevent stronger price growth. As reported in previous Economic Eye reports, decisions by NAMA on its disposal of property asset holdings also have the potential to significantly impact the Island housing and wider property market, but to date NAMA has managed this delicate balancing act well.

Interest rates, which to date have been at record low levels well below more normal 5% rates, have proven to be a crucial factor in keeping down the cost of borrowing and avoiding even larger house price falls. The surprise recent cut in rates by the ECB, given deflation concerns, is very welcome for the ROI economy. The Bank of England’s shift to a monetary policy of 'forward guidance' – pre-committing to keeping interest rates low until unemployment drops below a threshold rate – should also provide a boost to the NI housing market and mean interest rates remain lower for longer. The UK Government-backed 'help to buy' home ownership scheme, open to first-time buyers and home movers, has increased the availability of mortgages at competitive interest rate and with low deposits, providing a further boost to the NI housing market. However a key risk for NI, similarly to the risk facing ROI in the Eurozone context, is that interest rates could rise before a 'lagging' economy such as NI or ROI is ready.

The fact that consumer and investment demand, and housing markets, are so weak despite record low interest rates for a sustained period is an important reminder of the economy’s underlying weakness, and how vulnerable the tentative recovery would be to an earlier rise in interest rates.

Fig 1.2ROI, NI and UK house prices

2008 = 100

0

50

100

150

200

250

2000 2005 2010 2015 2020 2025 2030

Forecast

UK

ROI

NI

Source: CSO, NomisDepartment of the Environment, Community and Local Government, DCLG, EY Economic Eye *ROI data based on preowned housing UK and NI based on mix-adjusted house prices

2007–2013 (% change)ROI: -33.0%NI: -46.5%UK: 1.5%

2013–2030 (annual average forecast growth)ROI: 3.9%NI: 3.2%UK: 4.4%

2013 price level comparable to:ROI: 2003NI: 2004/05

The housing market is stabilising as house prices appear to have reached their ‘floor’ or have even undershot their fair value. There are signs of modest rising prices in ROI, albeit driven by Dublin’s property market, and levels of housing activity in NI are up from their recent lows, but are still well down on peak levels.


Box 1.1: Will a two-tiered housing market develop on the Island?The housing market in Great Britain has been performing very differently to the Island housing market. Price falls were much more modest, helped by a smaller boom relative to this Island, and a recovery which began sooner. Prices today are already above their pre-recession peak.

But within Great Britain there is a clear two-tiered housing market, with the housing markets of London and the South East performing much stronger than elsewhere. London house prices, for example, are now 20% above peak. High demand from in-migration, constrained supply, an underlying stronger economy and overseas investment all have contributed to this exceptional price growth, which few predicted.

With Dublin house prices starting to grow faster than the ROI national average, this begs the question of whether the Island housing market is likely to evolve along a similar two-tiered system in future, with Dublin and Belfast price growth outstripping ROI and NI growth?

The Winter 2013 Economic Eye view is this is marginally more likely for Dublin, but to nowhere near the same divergence as in Great Britain. The relative demand-supply factors are simply not the same as in London currently. For NI, continued austerity will impact on the Belfast housing market. But Belfast’s dominant role as NI’s professional services base and reversing long-term population trends means its house price fundamentals are at least stronger than any other part of NI.

1.2 Output growing but a bumpy recoveryThe good news on the labour and housing markets has not been fully replicated in the output data where the recovery remains bumpy. This applies even to the UK which has by some distance the strongest of the three labour and housing markets.

UK GDP contracted in 2012 Q2 and Q4, while employment was growing, and came close to a triple-dip recession in 2013 Q1. But since the start of 2013 the UK has posted three strong quarters of growth, with overall 2013 GDP growth now revised up to 1.4% in the Winter 2013 Economic Eye. The UK’s 2013 Q3 GDP growth was its strongest performance in three years and the fastest growth across G7 economies.

The ROI economy has posted four quarterly contractions in GDP out of the last six quarters, with growth in 2013 Q2, while positive, turning out weaker than consensus forecasts. GNP growth has been negative in three of the last six quarters, but annual GNP growth for both 2012 and 2013 is much higher than annual GDP growth, with the latter also revised down historically for 2009, 2010 and 2012.


Box 1.2: GDP and GNPGDP measures the total output of the economy, aggregating the value of wages and profits by all employees, companies and self-employed persons. This generates income but not all of the income earned in the economy remains the property of residents. The total income remaining with ROI residents is GNP. It differs from GDP by the net amount of incomes sent to or received from abroad.

The large-scale operations of the affiliates of foreign multinationals in ROI mean that there is a large gap between GDP and GNP due to the high recorded profits of these firms. The divergence between GDP and GNP levels has been around for a long period but the rising level of re-domiciled firms arriving in ROI is now causing greater disparity. Re-domiciled firms are counted as ROI firms, since the headquarters are located in ROI even though they have virtually zero domestic activities. By contrast, traditional multinationals invest in ROI to produce goods and services, contributing to the economy through employment, exports, and taxes.

The impact of the ‘patent cliff’ in the pharma sector (see Box 2.2 later) has had a significant impact on the GDP and exports of ROI, but less so GNP. It thus has had a limited impact on the welfare of citizens. People have benefited more from an improving labour market during which the 'patent cliff' has impacted on the pharmaceutical sector, than during the strong export years in 2010 and 2011 pre-'patent cliff'. This is because nearly all of the direct cost of the loss of patent protection accrues to the foreign owners of the pharmaceutical firms located in ROI.

Recent divergences in GDP and GNP growth raises again the issue of which measure of economic output to focus on for ROI: GDP as nearly all other countries do, or GNP accounting for the net outflow of multinational profits and other international transfers, which is often considered to paint a more accurate picture of ROI economic performance. The Winter 2013 Economic Eye, as with previous reports, presents analysis and forecasts for both.

There is no officially published, quarterly economy-wide output data for NI, or indeed for any other UK or ROI sub-national region. But two sources – DETI’s Composite Index and the Purchasing Managers Index (PMI) - provide useful barometers of higher frequency output performance. The DETI Composite Index has fallen in two of the last five quarters, with the 2013 Q1 value, the latest available, down by 0.8% on 2012 Q4, and down 1.2% on the same quarter in 2012. UK GDP performance was much stronger in the same quarter. The survey-based PMI, a measure of private sector activity across a range of indicators, paints a more positive picture of the NI economy. A score of 50 suggests no change from the previous month; a score of above 50 suggests an increase in activity from the previous month and a score below 50 suggests a contraction in activity. The September 2013 PMI showed that NI output increased for the third successive month. The latest score is the strongest since August 2007 and only slightly slower than that recorded across the UK. The expansion was enjoyed across the construction, manufacturing and service sectors, with the manufacturing sector particularly buoyant. New business orders (another PMI indicator) expanded for the fourth consecutive month. The PMI also recorded increases in employment levels for the third consecutive month. Respondents placed the latest rise in staffing levels primarily as a result in the increase in new business orders.

Given data quality and definitional issues, it is important to balance assessments across more than just one output indicator, in addition to looking at jobs data to get a true picture of the underlying economic health of the Island economy. It is also important to consider longer-term trends and not over-interpret one month or one quarter’s data which can just as easily reverse or be revised. So for ROI it is important to look at consecutive quarterly growth in both GDP and GNP, and for NI, growth in both DETI’s Composite Index and the PMI, in conjunction with other relevant economic indicators.

The divergence in growth rates between GNP and GDP in ROI shows the importance of looking across a range of indicators.

Despite good news in the domestic economy, and general improving sentiment, this has not been replicated across all economic indicators, notably output indicators. The bumpy recovery in output across the Island is not necessarily surprising given it is still early, tentative days in the recovery cycle. The UK economy experienced a similar bumpy recovery in output.


1.3 How sustainable is the recovery?Taking on board latest data and developments, including the recent ROI budget, and latest international outlooks which matter for trade prospects, Tables 1.2-1.4 present the revised All-Island and UK Winter 2013 Economic Eye economic growth forecasts.

Beginning with 2013 for which outturn data is available for the first half of the year, the All-Island growth forecast has been revised down from 0.7% to 0.0%. This follows a revised down growth rate of -0.1% for 2012, indicating two years of flat-lining.

ROI’s GDP growth forecast for 2013 has been revised down from 0.8% to -0.2%, with NI’s outlook actually revised up from 0.2% to 1.0% on account of a strong UK upward revision. ROI’s Department of Finance also substantially revised down its 2013 GDP outlook to 0.2%. This justifies again the Economic Eye’s traditional more cautionary outlook as others have downgraded in the same direction. GNP growth performance in 2013, as in 2012, is much stronger than GDP, with forecast growth of 2.4% in 2013 compared to -0.2% for GDP. The importance of looking at both GDP and GNP cannot be overstated.

For 2014 and 2015, All-Island growth has also been revised down but is at least positive at 1.7% and 1.9%, compared to 2.1% and 2.5% respectively in summer 2013. This again is driven by downgrades to ROI’s GDP outlook to 1.6% and 1.9% (from 2.2% and 2.6%). NI’s latest 2014 growth outlook is 2.0% (up from 1.7%) and 2.0% for 2015 (down from 2.2%), matching revisions to the UK ITEM GDP forecast.

ROI ROI NI NI DETI composite index UK

All IslandGDP GNP GVA GVA GDP

2012 Q1 -0.5% 0.0% - 1.2% 0.0% -

2012 Q2 0.5% 4.5% - -1.5% -0.5% -

2012 Q3 -0.8% -1.7% - 1.0% 0.6% -

2012 Q4 -0.2% 0.3% - 0.0% -0.3% -

2013 Q1 -0.6% 2.2% - -0.8% 0.4% -

2013 Q2 0.4% -0.4% - - 0.7% -

2013 Q3 0.6% -0.2% - - 0.8% -

2013 Q4 0.6% -0.6% - - 0.5% -

2008 -2.2% -1.8% -1.7% - -0.8% -2.1%

2009 -6.4% -9.1% -5.1% - -5.2% -6.2%

2010 -1.1% 0.5% 1.5% - 1.7% -0.6%

2011 2.2% -1.6% 0.7% - 1.1% 1.9%

2012 0.1% 1.8% -1.0% - 0.1% -0.1%

2013 -0.2% 2.2% 1.0% - 1.4% 0.0%

2014 1.6% 1.0% 2.0% - 2.4% 1.7%

2015 1.9% 1.7% 2.0% - 2.6% 1.9%

2016 2.6% 2.3% 1.8% - 2.5% 2.4%

2016 - 2023 avg. 3.4% 3.3% 2.4% - 2.6% 3.2%

Table 1.2ROI, NI, UK and All-Island GDP/GVA

Source: CSO, ONS, DETI, EY Economic Eye


For ROI, a key element of the 2013 downgrade is the exceptionally weak Q1 performance when GDP contracted by 0.6%. This was driven by poor consumer and investment figures, further exacerbated by a sharp fall in exports. The remaining three quarters are expected to show growth but this is not enough for overall calendar year growth to move into positive territory. The negative growth forecast for consumer, government and investment spending are not new developments. But export growth of only 0.6%, following comparatively weak growth of only 1.6% in 2012, is noteworthy as it represents a downgrade from 2.2% since the summer 2013 Economic Eye. The 2014 and 2015 ROI GDP downgrades are also largely explained by weaker export growth. As explained in the next chapter, ROI’s export sector faces some unique challenges, such as the pharmaceutical 'patent cliff', which have a much greater disproportionate impact in ROI compared to NI or the UK.

Private consumption

Government consumption Investment Exports Imports GDP

2012 Q1 -0.6% 0.3% 17.1% 1.7% 5.1% -0.5%

2012 Q2 0.6% -2.0% -23.1% -0.7% -5.7% 0.5%

2012 Q3 1.1% -0.1% 13.3% -0.3% 3.4% -0.8%

2012 Q4 -0.3% -0.3% -1.4% 0.6% -0.9% -0.2%

2013 Q1 -2.5% 0.2% -6.4% -3.5% -0.6% -0.6%

2013 Q2 0.7% -1.3% -3.4% 4.2% 0.7% 0.4%

2013 Q3 (f) -0.2% -0.2% 1.4% 1.4% -0.5% 0.6%

2013 Q4 (f) -0.4% -0.2% 1.5% 0.8% 0.2% 0.6%

2008 0.1% 0.6% -9.8% -1.1% -2.9% -2.2%

2009 -5.1% -3.3% -26.9% -3.8% -9.7% -6.4%

2010 0.9% -6.9% -22.7% 6.4% 3.6% -1.1%

2011 -1.5% -2.8% -9.6% 5.3% -0.4% 2.2%

2012 -0.3% -3.8% -0.7% 1.6% 0.0% 0.1%

2013 (f) -1.8% -1.8% -9.5% 0.6% -0.8% -0.2%

2014 (f) -0.2% -1.9% 5.1% 3.0% 0.4% 1.6%

2015 (f) 0.8% -1.5% 5.9% 3.1% 2.7% 1.9%

2016 (f) 1.0% -0.2% 5.0% 4.0% 3.4% 2.6%

2016-2023 avg. (f) 2.6% 1.3% 5.0% 4.0% 3.7% 3.4%

Table 1.3ROI economic growth by expenditure component (% annual/quarterly growth)

Source: CSO, EY Economic Eye


Box 1.3: Impact of ROI budget on ROI Economic Eye Winter 2013 GDP outlookThe recent October budget, the ROI’s eighth austerity budget in total, has important implications for the economy’s recovery. The overall size of the fiscal adjustment was €2.5 billion, down from the originally planned €3.1 billion. Even with the lower fiscal adjustment, the 2014 deficit is forecast to be lower than the Troika target of 5.1% of GDP. The Winter 2013 Economic Eye forecast has factored in this lower adjustment, which primarily impacts on the government consumption component on GDP.

The 'consumer drag' has been highlighted by previous Economic Eye reports as a significant constraint to recovery. A key positive from the 2014 budget is that there will be no new income tax increases or VAT increases, meaning that the vast majority of consumers are at least not considerably worse off. Although unpopular amongst the elderly, a further boost, albeit modest, to the domestic economy will come from the increase in the Deposit Interest Retention Tax (DIRT). With interest rates already very low, this tax hike will create a further disincentive for savers and is likely to modestly boost consumer expenditure.

The news of the Government’s commitment to a trade finance initiative will provide a timely boost for SMEs struggling to finance export growth strategies, especially at a time when export growth is slowing. The reduced rate of VAT (9% down from 13.5%) for the hospitality sector was retained in the latest budget.

The Home Renovation Incentive will enable home-owners to benefit from tax relief on home improvement expenditures. Given the massive job losses and decimation of the ROI construction industry, this initiative should spark increased activity and expenditure in this important, labour-intensive sector of the economy.

Many of these measures are all directly aimed at the domestic economy and are to be welcomed. The Department of Finance is assuming a spiral effect from these measures on GDP. The Winter 2013 Economic Eye is more cautious on just how quickly domestic demand can fully lock in and accelerate the ROI economy to recovery.

For the UK and NI, the more positive 2013 and 2014 outlooks are primarily down to stronger consumer and net trade growth, with business investment also set to grow strongly from 2014. The latter has been predicted before but disappointed due to reasons such as weakness in global demand and tight restrictions on the property market. So it will be important to observe whether 2014 is the year of the great UK business investment revival.

The need for simultaneous domestic and international growth remains a key requirement for a sustainable and lasting recovery. As with recovery in the labour market, output recovery also needs to be broad-based, driven by the consumer, business investment, exporters and – ideally – the government.

For six years between 2008 and 2013, domestic demand – the sum of consumer, government and investment – has made a negative contribution to ROI GDP growth. Between 2010 and 2013, net trade has made a positive but reducing contribution to growth. With export growth slowing and its forecast downgraded, the RoI’s economic recovery will only be sustainable through improving domestic demand. The ROI government recognises this and has enacted measures in the budget, albeit limited by the fiscal constraints, to support domestic sector growth. For example the measures related to the tourism and hospitality sector, construction and to discourage saving. But even with these measures, which the Economic Eye welcomes, the Winter 2013 Economic Eye outlook remains more cautious about domestic demand. Domestic demand is not forecast to make a positive contribution to growth until 2015. While there are upsides to consumer spending – such as the improving jobs market and low inflation – household debt, repossession risk, muted wage growth, emigration and one or two more years of austerity all continue to act against the consumer significantly supporting recovery in the short-run.

The recent RoI budget may have made consumers no worse off, but there was little fiscal space to make them any better off. While the budget fiscal adjustment was €2.5 billion as opposed to an earlier planned €3.1 billion, it is still an austerity budget and the effects and measures of previous austerity budgets will be felt in the coming years also.


Private consumption

Government consumption Investment Exports Imports GDP

2012 Q1 0.3% 2.4% 3.6% -1.8% 0.6% 0.0%

2012 Q2 0.4% -1.4% -0.8% -0.4% 1.4% -0.5%

2012 Q3 0.1% 0.2% -2.4% 2.0% 0.8% 0.6%

2012 Q4 0.6% 0.3% -3.8% -1.7% -0.9% -0.3%

2013 Q1 0.5% -0.2% 0.1% 0.1% -0.8% 0.4%

2013 Q2 0.3% 0.5% 0.8% 3.0% 2.9% 0.7%

2013 Q3 0.3% 0.0% 0.4% 0.5% -1.3% 0.8%

2013 Q4 (f) 0.4% 0.0% 1.4% 1.2% 0.9% 0.5%

2008 -1.0% 2.1% -6.9% 1.1% -1.7% -0.8%

2009 -3.6% 0.7% -16.7% -8.7% -10.7% -5.2%

2010 1.0% 0.5% 2.8% 6.7% 7.9% 1.7%

2011 -0.4% 0.0% -2.4% 4.5% 0.3% 1.1%

2012 1.2% 1.7% 0.9% 1.0% 3.1% 0.1%

2013 (f) 1.6% 0.2% -3.1% 2.5% 0.9% 1.4%

2014 (f) 1.9% -0.5% 6.5% 5.3% 3.5% 2.4%

2015 (f) 2.2% -0.6% 8.2% 5.9% 5.4% 2.6%

2016 (f) 2.3% -1.0% 7.4% 6.0% 5.6% 2.5%

2016-2023 avg. (f) 2.5% 1.2% 4.1% 4.1% 3.8% 2.6%

Table 1.4UK economic growth by expenditure component (% annual/quarterly growth)

Source: ONS, EY Economic Eye


Fig 1.3ROI domestic demand and net trade contribution to GDP growth

% contribution GDP growth


-15

-10

-5

0

5

10

15

1990 1994 1998 2002 2006 2010 2014 2018

Domestic demand Net exports

Forecast

The UK has in some ways been the mirror opposite of ROI. Domestic demand has held up relatively well in recent years – not suffering from a construction bust on anywhere near the same scale or implementing austerity cuts to the same degree – while the contribution from net trade has fluctuated from positive to negative. The UK typically runs a trade deficit compared to ROI’s trade surplus. Going forward domestic demand is forecast to continue to be the mainstay of the UK’s recovery, led by the consumer and a revival of business investment.

Given local conditions in NI, the sustainability of the recent recovery is on less solid foundations compared to the UK. Consumers face a weaker jobs market, and welfare reform poses a proportionately greater risk to NI household incomes. Relative to ROI where consumer prices have barely changed since 2008, the UK consumer price index has increased by 17% over the same period, squeezing disposable incomes and making austerity feel more severe than it has been. Business investment may not offer the same stimulus in NI as in the UK given NI’s smaller business base, lower corporate cash stockpiles, fewer investment opportunities and greater reluctance of banks to lend. Exports offer a genuine opportunity and should be pursued, but there is a limit to the scale of overall growth exports can unleash in the short-term given NI’s low export base.

More positively, the Northern Ireland Executive continues to make a hard push on inward investment, including hosting another recent investor conference, and has secured some notable recent inward investment successes. Simultaneously, the private sector is promoting the importance of NI as a place to invest and work in order to accelerate growth through the 'Growing Something Brilliant' agenda.

2007–2013 (% change)Domestic demand: -22%• Consumer spending: -8% • Government consumption: -17%• Investment: -59%

Exports: 9%Imports: -10%


Structurally, NI’s biggest economic problem is it dependence on public spending, the one area it has relatively little influence over. This is in contrast with ROI, which is exiting its bailout programme and will thus have much greater room for fiscal manoeuvre without seeking Troika approval. There has been much talk of austerity in NI but the UK and NI have yet to experience austerity in the same way as the RoI has over the past five years, although higher inflation has played some part in making it feel more austere. Another parliament of austerity is on the horizon for NI. Unless there is a shift in the austerity versus stimulus debate in the UK – drawing on lessons from other countries – or a new government in Westminster at the next elections, NI’s economic recovery will be vulnerable to austerity and other downward pressures on domestic demand. Where NI could do better however is to more closely evaluate current spending levels and determine how to deliver a greater stimulus effect, for example reversing the cuts in capital spend. All eyes will also be on the Scottish independence referendum in September 2014. Regardless of the outcome, with a push for greater devolved fiscal powers in Wales also, the most likely future scenario is that NI will be able to have more control over its spending and taxation, if it chooses to. But whether that means NI will be more insulated from austerity or will be able to, or decide to, cut its Corporation Tax rate in line with ROI, remains to be seen.

What many people do not realise is that the UK and NI are yet to experience fiscal austerity in the same way as ROI has over the past 5 years, and another parliament of even tougher austerity is on the horizon. Unless there is a shift in the austerity versus stimulus debate, NI’s economic recovery will be extremely vulnerable to more and tougher austerity.

2008 - 2013 (% change)Domestic demand: -3%• Consumer spending: 0% • Government consumption: 3%• Investment: -18%

Exports: 5%Imports: 0%

For NI, the greater risks are probably further out into the future, which risks breeding some complacency today as the economic figures improve. By this longer-term stage, ROI will or should have addressed many of its challenges.

Fig 1.4UK domestic demand and net trade contribution to GDP growth

% contribution GDP growth


-15

-10

-5

0

5

10

15

1990 1994 1998 2002 2006 2010 2014 2018

Domestic demand Net exports

Forecast


Chapter 2Chapter 2

Exports and FDI key to economic recovery but all sectors need to drive the jobs recovery

2.1 Sizing the global trade opportunityThe broad starting point when looking at global trade opportunities, and to a certain extent also inbound FDI, is to consider growth prospects in target markets. Of no surprise is China and India topping the future global growth league tables. But some of the shine has been taken of these two economies as a result of recent developments and forecast downgrades. According to EY’s Rapid-Growth Markets Forecast (RGMF), a weak recovery in trade and investment across rapid-growth markets will keep the growth outlook in 2013 subdued. India in particular is disappointing with its lack of reforms, leading to growth in 2013 falling to a well below trend rate of 4.1%.

However, the main drivers of strong growth in emerging markets remain intact and both China and India still represent huge and growing markets. India’s longer-term growth is forecast to be over 6% according to the Winter 2013 Economic Eye. Other Asian markets, like Indonesia and Vietnam, are predicted to forge ahead, while Chile and Colombia are expected to do well in Latin America.

After China and India in the growth league table come Sub-Saharan Africa, the wider Asia-Pacific and the Middle East & North Africa (MENA), as the next fastest growing economies over the next decade. What is surprising is that future growth in Latin America is not markedly ahead of the US. Notwithstanding the reputational damage caused by the Government shutdown, the resurgence of the US economy has been a key driver of the global economy. The US recovery has been driven by a number of factors including improved competiveness through falls in real wage rates and lower energy costs due to its innovative exploitation of new energy sources. After the US, the UK’s long-term growth prospects look bright relative to the Eurozone and Japan.

The implication of the above is that it is time to look at global trade opportunities through a different, more balanced lens. Especially for the All-Island economy where the US and UK represent key markets today, this suggests a need to strike a balance between traditional trade and investment linkages, and potential new linkages to the world’s fastest growing markets.

Table 2.1Major country and region GDP growth

Source: EY Economic Eye

2011 2012 2013 2014 2014 - 2023

China 9.3% 7.7% 7.4% 7.1% 7.0%

India 7.5% 5.1% 4.1% 4.5% 6.4%

Sub-Saharan Africa 4.9% 4.9% 4.3% 4.9% 4.9%

Asia Pacific 4.2% 4.3% 4.1% 4.1% 4.4%

Middle East and North Africa

2.7% 3.9% 2.8% 4.2% 4.2%

Latin America 4.4% 2.9% 2.6% 2.9% 3.5%

World 2.9% 2.4% 2.1% 2.9% 3.2%

Unites States 1.8% 2.8% 1.6% 2.9% 2.9%

United Kingdom 1.1% 0.1% 1.4% 2.4% 2.6%

Eurozone 1.6% -0.6% -0.3% 0.9% 1.6%

Japan -0.6% 2.0% 1.9% 1.6% 1.0%

Looking beyond GDP growth, the even more important economic variable for trade is how much a country imports and how import levels are forecast to grow. Although the rate of Chinese import growth is predicted to be double that of the US – and a stronger Yuan means exporting into China should become easier – by 2023 the US will still be the largest importer measured in today’s exchange rates, with its absolute import growth also just exceeding Chinese growth. There will however be noticeable shifts in the world order with countries like Vietnam, Nigeria and Egypt significantly increasing their import footprint, and emerge alongside the BRICs.

The US will still remain in a decade’s time the world’s largest import market, with Great Britain also still ranking highly. It will be very hard for the Island’s businesses to match current export market shares of the US, Great Britain and European markets in emerging economies, even in the very long-run.


Not only will absolute import demand rise in these countries but the nature of exporting opportunities will shift, which should play into the hands of carefully positioned advanced economies. Emerging market mega-trends like the rising middle class, ageing populations, changing consumer tastes and increasingly sophisticated economies all bring new, exciting opportunities for business.

Fast growth and huge import levels do not translate automatically into rapid export growth to emerging markets for each and every country, only those with current and rising penetrations of these markets. Based on UNCTAD data, ROI’s goods penetration rate – its export value to a country expressed as a share of that country’s total import value – ranges from 2.8% for UK and 1.4% for US imports, to only 0.2% for China and less than 0.1% for India. The penetration figures are even smaller for NI. NI’s goods penetration for North American imports is only 0.05% – 30 times less than for ROI – and around 0.24% for Europe, five times less than for ROI.

There are clear reasons why the Island economy has greater trade links to the US and UK – for example historical trade, political and cultural ties, distance to markets and a common language. There are also valid reasons why the Island does not trade more with, say China. A country can only trade with another if it produces a good or service in demand by the import country. Some of China’s largest imports by value are oil, metals and minerals, which neither ROI nor NI produce in sufficiently large quantities, never mind the distance and cost to transport these goods. The Australian economy has been a major beneficiary of its relative proximity to China and abundant mineral resources. But Australia has also worked hard in many other ways, including diplomatically and via education links, to develop a mutually beneficial trading relationship with China.

This is not to say that the Island should not attempt to export more to China. But businesses and export agencies should pick their targets carefully, recognising also that the Chinese economy is increasingly producing more of the high value products and services which it needs, and in some sectors is itself a world leader.

Table 2.2Selected country import levels and growth

Source: Haver Analytics, EY Economic Eye

2012 2012 - 2023 growth

2012 - 2023 change

(US$ bn nominal) (US$ bn 2005 prices) (%)

US 2,740 1,480 66.1%

China 2,100 1,370 120.3%

Germany 1,570 600 43.6%

UK 840 230 32.2%

France 770 290 43.2%

Netherlands 610 150 28.7%

Italy 580 120 26.9%

India 580 800 179.9%

Vietnam 480 390 147.6%

Russia 450 290 88.1%

Australia 330 110 44.7%

Brazil 310 180 77.9%

Nigeria 310 200 104.2%

Egypt 270 270 116.4%

Indonesia 230 180 135.5%

It is important to diversify export destinations and tap high growth potential markets, and diversify sources of FDI. Exports remain one of the key platforms for long-term growth, with selling to fast growing emerging markets an economic development and corporate priority for most governments and business. The forecast strengthening of the Chinese Yuan, and trends like the rising middle class, ageing populations, changing consumer tastes and increasingly sophisticated economies, all bring new, exciting opportunities for business provided that the Island’s export offering can align with these opportunities.


In line with a weaker growth outlook and uncertainty still about the stability of the Eurozone, the euro is forecast to weaken in the medium-term against the dollar, and to a lesser degree versus sterling. This should, in theory, provide a boost to ROI’s export competitiveness and favour the ROI exporters selling into NI. It therefore may also affect cross-border trade. A weaker euro will mean more upward pressure on imported inflation but with annual consumer price inflation in ROI barely above 0%, there is plenty of room for inflation to rise without harming the recovery. A weaker euro and persistently lower inflation in ROI is going some way to correcting price differentials between ROI and NI, which peaked in recent years leading to the high levels of cross-border shopping in centres such as Newry, Derry/Londonderry and Enniskillen.

The Winter 2013 Economic Eye forecast is for sterling to modestly weaken against the dollar, although overall the dollar-sterling exchange rate has been relatively stable since 2010.

The appreciation of the Yuan has already been mentioned as an upside risk. The Chinese Yuan has appreciated against both the euro and sterling since 2008, and is forecast to appreciate by 25% against the euro over the next 10 years, and by 18% against sterling. This means that in 10 years’ time, compared to today, producers in ROI and elsewhere in the Eurozone selling to China will be a quarter more competitive in exchange rate terms.

However in contrast the opposite is true for big markets like Brazil and India where the Brazilian Real and Indian Rupee are forecast to steadily depreciate. Recently both India and Japan have seen sharp depreciations, which have made competing against business in these economies more challenging.

Fig 2.1a and bEuro (a) and Sterling (b) exchange rates

Euro value (€)


0.60

0.80

1.00

1.20

1.40

1.60

2005 2007 2009 2011 2013 2015

ForecastEuro weakening

US$

UK£

2013 Q3 €1=$1.32

2013 Q3 €1=£0.85


1.00

1.20

1.40

1.60

1.80

2.00

2.20

2005 2007 2009 2011 2013 2015

ForecastSterling weakening

US $

Euro €

2013 Q3 £1=$1.55

2013 Q3 £1=€1.17

Sterling value (£)


. 2.2 Island’s recent and current export and Foreign Direct Investment performance2.2.1 ExportsROI’s main markets for manufactured goods exports are the US, Great Britain and continental Europe. Exports to Asia are a small share of the total, and exports to NI make up only 1%, 20 times less than manufactured exports to the US. While export market shares are low across all emerging markets, ROI has a higher penetration of markets in Brazil and Russia, compared to India and Indonesia. ROI’s manufactured exports to China are larger than the sum of exports to Brazil, Russia, India, Egypt and Indonesia combined.

Box 2.1: 'Abenomics' – Japan’s home grown and radical alternative to austerityThe Japanese stimulus packages and radical macroeconomic policies, known as 'Abenomics', have continued to be successful in stimulating a previously stagnant Japanese economy with worryingly high deflation rates.

The depreciating Yen, which fell from 87 ¥ to 98 ¥ versus the dollar between the start of 2013 and October, has not only driven up demand for Japanese exports, but also encouraged Japanese companies to expand their operations. This is significantly altering the balance of global export competitiveness in sectors where Japan is a major player.

'Abenomics' consists of monetary policy, fiscal policy, and economic growth strategies to encourage private investment. Specific policies include inflation targeting at a 2% annual rate, correction of the excessive Yen appreciation, setting negative interest rates, radical quantitative easing, expansion of public investment, buying operations of construction bonds by Bank of Japan and revision of the Bank of Japan Act. It represents a form of stimulus despite high public debt challenges, and is in stark contrast to the austerity approach driving/hindering recovery elsewhere.

Fig 2.2ROI goods exports by destination market (2012)

Source: CSO

United States20%

Great Britain15%

Belgium15%Germany

8%

Switzerland5%

France5%

Netherlands4%

Spain3%

Italy3%

Japan2%

China2%

Northern Ireland1%

Other 17%


NI’s main market for manufacturing external sales is Great Britain, accounting for two-thirds of trade. Next are ROI, North America and Europe. Like ROI, NI manufactured exports to Asia are comparatively small. NI is proportionately more dependent on ROI as an export destination than vice versa, and has much less of an export footprint in the US. While export destination detail is limited, the available data indicates the Middle East as an important export destination, with NI exporting a higher value of goods here than to either Italy or the Netherlands.

In terms of service exports, ROI’s destination markets are well-diversified across the UK, Germany, US and other parts of Europe. There is also a sizable 'other' destination category which includes off-shore markets linked to financial service exports.

Fig 2.3NI goods external sales by destination market (2011/12)

Source: DETI

GB60%

ROI10%

North America Total8%

Switzerland3%

Asia Total3%

Germany3%

France2%

Middle East Total2%

Netherlands1%

Italy1%

Belgium1%

Other6%

Fig 2.4ROI services exports by destination market (2012)

Source: CSO

United Kingdom19%

Germany9%

United States9%

France6%

Italy6%Netherlands

4%Japan

3%

Spain3%

China3%

Switzerland2%

Other36%


NI service exports are, like manufacturing external sales, heavily dependent on the Great Britain market. Service exports to the rest of the world are made up primarily of computer service and tourism exports. It should be noted that this is not a full coverage of NI service sector exports which are poorly recorded by official statistics.

In value terms, the ROI’s top four export sectors are an enviable mix, combining high value computer and business service exports, with high tech medicinal and pharmaceutical products and organic chemicals. The value of these four sectors alone in 2012, totalling €106 billion, is three times the size of the NI economy. Although the export value of ROI’s pharmaceutical sector, for example, overstates its importance to the economy. This is because of its high import content, which includes large royalty service imports for intellectual property rights. Agri-food is ROI’s third largest goods export sector, but only its sixth largest export sector overall including service exports.

NI’s dominant export sector is food and drinks, with external sales worth euro €8.5 billion, bigger than the proxy equivalent sector in ROI (agri-food). This is more than 50% larger than the combined value of the rest of its top five goods external sale sectors and top five service export sectors.

Unlike ROI, NI has failed to develop a significant service export sector, or at least one that is well measured by statistics, either in terms of external service sales to Great Britain or the value of activities undertaken by cost centre operations in sectors like financial technology. ROI’s tourism exports are five times NI’s out-of-state visitor spending, including spend by visitors from Great Britain, while ROI computer service exports are over 150 times the level in NI. Given how multinational profits are recorded, it could be argued that ROI exports in sectors like ROI IT are over-recorded relative to the actual activity which takes place on the Island, with the opposite true for NI.

Fig 2.5NI services external sales by destination market (2011/12)

Source: DETINote: High export potential services and tourism

Great Britain55%

Republic of Ireland13%

Rest of EU9%

Rest of World23%

NI will not be able to export its way out of recession. With the exception of the agri-food sector in which NI has considerable export strength, NI lags far behind ROI in terms of the scale of its export base – from pharmaceuticals to IT, tourism to financial services – and in terms of its footprint in key export markets outside Great Britain like the US.


Table 2.4NI top five goods and service external sales by value

Source: DETI

* For better comparison with ROI exports, which include exports to GB, NI trade figures in Table 2.4 also include external manufacturing sales to GB and GB out-of-state tourist visitor spending. The stricter statistical definition for NI exports excludes GB sales.

Rank Product/service category Value (2012)€m

Goods 1 Manufacturing of food, beverages and tobacco 8,554

2 Manufacture of machinery and equipment 1,150

3 Manufacture of electrical equipment 1,119

4 Manufacture of other transport equipment 1,043

5 Manufacture of rubber and plastic 795

Services 1 Tourism 620

2 Computer and related activities 220

3 Research and Development 34

4 Architectural and engineering activities and technical testing and analysis 29

5 Repair and installation of machinery 27

Table 2.3ROI top five goods and service exports by value

Source: CSO

Rank Product/service category Value (2012)€m

Goods 1 Medicinal and pharmaceutical products 24,551

2 Organic chemicals 20,068

3 Agri-food 8,132

4 Essential oils, perfumes, toiletries 6,246

5 Office machines and automatic data processing equipment 3,616

Services 1 Computer services 35,681

2 Business services 25,932

3 Insurance 8,910

4 Financial services 7,073

5 Transport 4,609


The Island has clear export specialisations – pharmaceuticals, organic chemicals and computer & business services in ROI and agri-food in NI. These specialisations are likely to remain dominant for the foreseeable future unless other exports sectors can unearth multi-billion euro earnings opportunities.

As explained in section 1, between 2010 and 2013, net trade has made a positive but declining contribution to GDP growth in ROI. ROI real export growth was 6.4% in 2010 and 5.3% in 2011, before dropping to 1.6% in 2012 and forecast growth of only 0.6% in 2013.

The slowdown in ROI exports has primarily been driven by a fall in goods exports, which fell by 6% in 2012 and are forecast to fall by a further 3% in 2013. Exports of services have been more resilient, growing by 12% in 2012 and forecast growth of 5% in 2013. Contributing to the recent weak performance of merchandise exports is the on-going effect of the 'patent cliff' within the pharmaceutical sector which has seen medicinal and pharmaceutical product exports fall by almost €2 billion between 2011 and 2012. Partially off-setting this was an almost €0.5 billion increase in exports of essential oils, perfumes and toiletries.

.

Box 2.2: ‘Patent cliff’The 'patent cliff' refers to the current situation in ROI where a large number of pharmaceutical patents/licenses, for example those of 'blockbuster' drugs, are set to expire soon. This means that the companies’ monopolies on production will disappear, with competitors able to enter the market with cheaper alternatives. This has and could lead to major job losses. The Irish Pharmaceutical Healthcare Association has recently put the level of job losses as high as 20% of the total pharmaceutical workforce, with sales staff the worst affected. This will impact areas of pharmaceuticals clusters most, including Cork. In the longer-term, the ramifications of the 'patent cliff' are uncertain and are largely dependent upon the sector’s ability to replace the expiring patents with new patent-protected products, which will be driven by R&D.

Service sector export strength in ROI has been fuelled by computer service exports, which have risen by €7.8 billion between 2010 and 2012. In terms of merchandise export destination markets, between 2008 and 2012, ROI has increased trade with the US, Belgium, Switzerland and Germany, and has seen a fall in trade with Great Britain, France and Spain.

Latest data show that NI’s total external sales have grown by over £750 million, or 6%, between 2009/10 and 2011/12, with both goods and service exports rising. Food and drink, the biggest export sector, has grown from £6.5 billion to £6.7 billion. Exports of manufactured machinery and equipment have grown by 60% from £574 million to £906 million. In relative terms, external sales of services have performed more strongly than goods, with growth of 25% between 2009/10 and 2011/12. This impressive growth has primarily been driven by NI’s tourism industry – helped by major events over the last number of years. Out-of-state visitor spending income grew by around than £120 million, from £367 million to £488 million, with growth driven by increased numbers of visitors from overseas and ROI.

A slowdown in ROI exports was always likely and had been forecast by the Economic Eye, making the need for recovery of the domestic economy even more pertinent. Weaker export performance has been driven by a fall in goods exports, particularly in the pharmaceutical sector.

The slowdown in ROI exports is part a result of weak global conditions and the disappointing pace of recovery. It is also part a result of product specific factors such as the 'patent cliff', which has significantly impacted on pharmaceutical exports.


2.2.2 Foreign Direct InvestmentFDI remains a crucial source of investment and employment for the All-Island economy. Despite the concern of using promoted jobs as a metric for growth measurement, planned investment from FDI has totalled more than £2.5 billion in NI over the last decade, resulting in the creation of more than 26,000 jobs. The majority of these jobs, just shy of 19,000, have been created in the services sector, with around 7,400 in the manufacturing sector. North America has been the primary source of FDI, with the US and Canada alone making combined investment in excess of £1.5 billion in over the last 10 years. In recent years, annual FDI job creation has remained resilient to the economic downturn, bouncing back to more than 2,500 in 2012/13, after dropping to below 2,000 in 2009/10 and 2011/12.

In ROI, IDA-assisted companies also make a critical contribution to the economy. Total permanent full-time employment in IDA-assisted foreign companies is almost 150,000 and has been around this level for a sustained period. Strongly performing FDI sectors include computer, electronic and optical, medical and dental instruments and food, with service sectors such as computer programming activities and computer facilities management performing well also.

2.3 Exporting to emerging markets easier said than doneThis chapter has illustrated the export potential of emerging markets but, at the same time, the current low penetration by All-Island businesses of these markets and greater ‘preference’ to trade with traditional markets like the US, Great Britain and mainland Europe.

Historical ties, geography, transport charges, cost competitiveness and a mismatch between export supply and import demand are all valid reasons why the Island does not trade more with emerging markets. But there is also one other major factor: exporting to emerging markets comes with a series of challenges and risks.

These include: language and cultural barriers, exchange rate volatility, trade barriers, barriers to market entry such as investment restrictions in key sectors, requirements to set up joint ventures which pose a risk to intellectual property, unpredictable application of laws and regulations and lengthy product certification periods, to name a few.

2.4 New markets should be pursued but alongside existing market strengthsThe intention of this chapter has been to present a balanced assessment of trade opportunities for the Island’s export businesses. The emerging lesson is one of current strengths and continued growth potential in traditional markets and sectors, and also a high-risk/high-return opportunity from selling to emerging markets.

The implication for businesses is to continue to focus on existing market strengths, while carefully exploring emerging market opportunities which will help to diversify and expand their corporate customer bases.

2.5 Still a 300,000 job challenge for the Island – how much can export and FDI sectors contribute to this target? An appropriate way to end this chapter, combining the themes of exports and FDI with recovery, is to consider the extent to which export and FDI sectors can contribute to the Island’s labour market challenge.

Scenario analysis undertaken for the Winter 2013 Economic Eye shows that to get unemployment rates across the Island back to pre-recession levels by 2020 would require almost 300,000 net new jobs compared to today (235,000 in ROI and 60,000 in NI). This is 140,000 more jobs than the baseline scenario with 100,000 extra needed to top up ROI jobs growth and 40,000 extra jobs for NI.

There is a need to strike a balance between more traditional sources of export success, and potential new sources. Businesses need to recognise the high-risk/high-return proposition of emerging export markets and work even harder than they do currently to traditional export markets to overcome obstacles such as language, culture, currency volatility, trade barriers, regulation and intellectual property issues.


To put these figures in context, ROI employment in IDA-assisted foreign firms today is around 150,000 or 8% of total employment. To meet the uplift needed in baseline jobs growth would mean an effective doubling in direct FDI employment, which over the last decade has remained stable amidst growing competition from other lower cost locations. According to data from Invest NI, 40k extra jobs would be equivalent to the total number of manufacturing and service FDI jobs created in the last 14 years. While export and FDI sectors remain crucial to the Island’s prospects, they cannot ‘get the job done’ on their own. Domestic sectors like construction, retail and public services must all play a leading role in the recovery of the labour market.

Getting back to past peaks is a highly ambitious target but one we should always have. This is especially true for employment in ROI where such a sizable element of employment was unsustainable and debt-fuelled, related to the property boom. Even excluding construction from overall employment analysis, the road to recovery in the Island labour market remains a very long one. In the Winter 2013 Economic Eye baseline scenario, ROI employment levels still have to wait until 2022 before returning to peak levels, even when excluding construction jobs from the loss and recovery. For NI regardless of whether construction jobs are included or not, there is no return to peak this side of 2030. In stark contrast to both the ROI and NI, UK employment has already returned to peak.

300k Island job challenge by 2020

• Recession job loss: Approx -370,000

• Cumulative net out-migration/reduction in labour supply from rising inactivity during recession: Approx -130,000

• Recovery and expansion in labour supply to 2020: Approx +90,000

• Jobs target between today and 2020: Approx +300,000 (excludes approx 30,000 jobs created in recent quarters)

• Winter 2013 Economic Eye net job creation forecast (2013-2020): 160,000 – 140,000 short of target

The long-term jobs target for the Island is the cold, hard fact that dominates all other long-run forecast messages. The Island needs to create 300,000 net new jobs by 2020 to get unemployment rates back to pre-recession levels. This is almost twice the number of jobs forecast to be created in the baseline Economic Eye Winter 2013 scenario.

All domestic and international sectors of the economy – from agriculture to manufacturing, construction to energy, retail to tourism, IT to professional services, and eventually again the wider public sector – will have to step up and make sizable contributions to the Island’s jobs target.

Year employment returns to peak:ROI: 2026 (2022 excluding construction)NI: >2030 (>2030 excluding construction)UK: 2013 (2012 excluding construction)

Fig 2.6ROI, NI and UK total employment forecast

Index * 2008 = 100

556065707580859095

100105110115

1990 1994 1998 2002 2006 2010 2014 2018 2022 2026 2030

UK

ROI

NI

Forecast

Source: CSO, NOMIS, DETI, EY Economic Eye* Employment index


Chapter 3Chapter 3

All-Island risk monitor assessment

There are multiple downside economic risks across the Island, some of which have been highlighted already. Some risks apply in both jurisdictions, while others are unique to either ROI or NI.

Tables 3.1 and 3.2 set out the most important downside economic risks for the two economies and whether the scale of the risk has increased, decreased or remained the same since the summer 2013 report six months ago.

Rank* Risk CommentaryChange in risk last six months**

1 Crackdown on multinational tax avoidance and pressure on ROI's 12.5% Corporation Tax rate

The Netherlands, Luxembourg and ROI are facing a European Commission inquiry over multinational tax practices. The concept of fiscal union in the eurozone, which has been under discussion, would place ROI's Corporation Tax rate 'on the table' for debate.Against this, the ROI Government has consistently sent a strong message that the Corporation Tax rate will not be reduced. Exit from the bailout programme eases external influence

2 Weaker and more competitive global trade environment

Export growth has slowed considerably in the last 2 years, and trade forecasts have been downgraded. Product-specific developments such as 'patent cliff' effects have a disproportionately large impact on total exports and GDP (but less so GNP)

3 Housing market repossession risk 1 in 8 private residential mortgages are in arrears but repossessions, to date, have been remarkably low. New personal bankruptcy law will force banks to deal with non-performing loans

4 Eurozone crisis The past 6 months have seen greater stability throughout the eurozone. ROI is also set to successfully exit its bailout programme in December, the first country to do so

5 Unresolved domestic banking problems

Banks are still making losses and are slow to deal with non-performing loans, which is undermining lending and wider investment in the economy

6 Inflation pressures

Inflation was over 3% in 2011 but has now fallen back to 0.2%. This is helping to ease cost of living pressures and downward pressure on real income growth. The opposite worry for ROI over the coming year, which the Economic Eye will monitor and track, may be deflation. But the recent surprise cut in ECB interest rates should help offset downward inflation pressures

Source: EY Economic EyeNote: * 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

Table 3.1ROI downside risk monitor

3.1 ROI risk monitor


This table is updated biannually in Economic Eye reports to assist businesses to assess, manage and mitigate their key corporate risks.

Rank* Risk CommentaryChange in risk last six months**

1 Austerity NI yet to experience austerity as tough as ROI - though inflation has meant existing cuts feel tougher. Future and tougher austerity still on the horizon in the next parliament

2 Labour market pressures Stabilisation of job levels, recent growth in full-time employment and more broad-based sectoral jobs recovery

3 Interest rate hike New Bank of England 'forward guidance' means interest rate rises are less likely in the near-term. But when interest rates do rise, NI's economy will be less ready than other parts of the UK economy

4 UK economy weakness UK economy now growing robustly with 2013 outlook revised up and labour market still strong

5 Inflation pressures Inflation has been flat at just below 3%, but remains above target and is adding to pressures on real incomes

6 Limited bank lending Banks still suffering from the fallout of the property crash and more risk averse, but bank profitability is improving

7 Weaker global trade environment and investor reputation

Weaker growth in emerging markets and downgrade to forecasts in all but a few economies. NI's reputation as an investment location, and its retail sector in Belfast, has not been helped by civil disorder over the last 6-12 months captured by global media. But there have been offsetting measures such as another major investment conference and the ‘Growing Something Brilliant’ agenda

Source: EY Economic EyeNote: * 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

Table 3.2NI downside risk monitor

3.2 NI risk monitor


AnnexesAnnexes

Private consumption

Government consumption Investment Exports Imports

Net stocks % GDP GDP GNP

2008 Q1 0.3 -0.5 2.4 -1.9 -1.6 3.9 -1.5 0.9

2008 Q2 -2.0 -0.3 -15.6 -1.2 -3.5 -1.3 -1.5 -1.3

2008 Q3 0.4 -0.1 7.7 -0.7 0.3 0.7 -0.5 -2.7

2008 Q4 -2.0 0.8 -16.1 -0.2 -3.6 1.0 -3.7 -2.8

2009 Q1 -3.0 -0.8 -9.1 -2.0 -4.2 -1.2 -1.2 -2.6

2009 Q2 -0.4 -2.0 -5.8 -0.9 -1.3 -1.1 -1.5 -2.7

2009 Q3 -0.4 -3.0 -2.5 -1.1 -3.5 -0.9 -1.1 -1.8

2009 Q4 0.0 -0.1 -7.8 0.8 1.1 -1.0 -1.1 -0.9

2010 Q1 1.0 -3.9 -14.4 3.3 0.5 -0.6 0.8 0.0

2010 Q2 0.7 -0.1 8.8 1.9 4.6 -0.9 -0.4 1.9

2010 Q3 0.2 -1.9 -10.5 4.0 1.7 -0.8 1.1 2.4

2010 Q4 -1.7 0.0 -8.0 -0.8 0.4 0.4 -1.3 0.8

2011 Q1 0.8 -0.5 7.8 2.0 0.2 -0.1 1.5 -3.8

2011 Q2 -0.9 0.0 -2.3 1.6 -2.2 0.6 1.4 0.2

2011 Q3 -1.6 -1.4 -14.9 0.5 -2.0 0.3 0.3 0.4

2011 Q4 0.6 -2.3 8.0 -0.4 -0.7 1.2 0.3 -1.3

2012 Q1 -0.6 0.3 17.1 1.7 5.1 0.3 -0.5 0.0

2012 Q2 0.6 -2.0 -23.1 -0.7 -5.7 -0.1 0.5 4.5

2012 Q3 1.1 -0.1 13.3 -0.3 3.4 0.7 -0.8 -1.7

2012 Q4 -0.3 -0.3 -1.4 0.6 -0.9 0.2 -0.2 0.3

2013 Q1 -2.5 0.2 -6.4 -3.5 -0.6 0.1 -0.6 2.2

2013 Q2 0.7 -1.3 -3.4 4.2 0.7 1.6 0.4 -0.4

Table A.1ROI economic growth performance by expenditure component (quarterly % growth)

Source: CSO


Private consumption

Government consumption Investment Exports

Exports of goods

Exports of services Imports

Net stocks % GDP GDP

2008 Q1 -0.4 1.7 -1.7 1.6 1.0 2.5 0.1 1.0 0.1

2008 Q2 -1.3 0.4 0.8 1.6 2.2 0.7 0.0 1.3 -0.9

2008 Q3 -1.1 0.8 -10.0 -1.5 -1.0 -2.1 -2.4 0.1 -1.4

2008 Q4 -1.7 1.2 -6.1 -3.8 -4.8 -2.4 -4.7 0.5 -2.1

2009 Q1 -1.0 -0.9 -4.9 -6.1 -8.4 -2.9 -6.4 -0.3 -2.5

2009 Q2 -1.2 -0.3 -1.1 -1.1 -0.8 -1.4 -1.1 -1.5 -0.4

2009 Q3 0.4 0.7 -4.6 1.4 1.7 1.0 0.4 -0.9 0.0

2009 Q4 0.9 0.3 -0.1 2.7 4.4 0.3 3.0 -1.0 0.4

2010 Q1 -0.8 -0.3 5.9 0.3 0.0 0.8 1.9 -1.1 0.5

2010 Q2 1.4 0.5 -1.7 4.0 5.7 1.7 2.7 0.0 1.0

2010 Q3 0.0 -0.1 4.1 0.3 0.6 -0.2 2.5 -0.1 0.4

2010 Q4 0.5 -0.1 -3.8 2.6 3.3 1.5 1.1 0.5 -0.2

2011 Q1 -1.2 -0.1 -4.8 3.8 2.0 6.4 -2.6 0.2 0.5

2011 Q2 -0.2 0.1 6.5 -5.2 -2.8 -8.8 -0.7 0.0 0.1

2011 Q3 0.0 -0.4 -1.1 1.1 -0.6 3.6 1.0 0.5 0.6

2011 Q4 0.6 0.4 -1.2 4.7 4.6 4.9 1.1 1.6 -0.1

2012 Q1 0.4 2.4 3.6 -1.8 -0.3 -4.0 0.6 0.1 0.0

2012 Q2 0.2 -1.4 -0.8 -0.4 -1.6 1.4 1.4 -0.3 -0.5

2012 Q3 0.2 0.2 -2.4 2.0 3.2 0.3 0.8 0.0 0.6

2012 Q4 0.7 0.3 -3.8 -1.7 -2.3 -0.9 -0.9 0.6 -0.3

2013 Q1 0.6 -0.2 0.1 0.1 -0.2 0.4 -0.8 0.6 0.4

2013 Q2 0.3 0.5 0.8 3.0 4.9 0.1 2.9 0.2 0.7

Table A.2ROI economic growth performance by expenditure component (quarterly % growth)

Source: ONS


Table A.3ROI key indicator forecasts


ROI forecasts (annual % growth unless stated)

2008 2009 2010 2011 2012 2013 2014 2015

GDP -2.2 -6.4 -1.1 2.2 0.1 -0.2 1.6 1.9

Private consumption 0.1 -5.1 0.9 -1.5 -0.3 -1.8 -0.2 0.8

Government consumption 0.6 -3.3 -6.9 -2.8 -3.8 -1.8 -1.9 -1.5

Investment -9.8 -26.9 -22.7 -9.6 -0.7 -9.5 5.1 5.9

Exports -1.1 -3.8 6.4 5.3 1.6 0.6 3.0 3.1

Imports -2.9 -9.7 3.6 -0.4 0.0 -0.8 0.4 2.7

GNP -1.8 -9.1 0.5 -1.6 1.8 2.2 1.0 1.7

Employment -0.7 -7.8 -4.0 -1.8 -0.6 1.5 0.7 0.8

ILO unemployment (000s) 146 267 302 317 316 293 274 252

ILO unemployment rate 6.4 12.0 13.9 14.7 14.7 13.7 12.9 11.9

General government balance (% GDP) -7.4 -13.7 -31.2 -13.1 -8.1 -7.6 -5.1 -3.0

General government gross debt stock (% GDP) 45.3 67.1 92.0 102.5 117.2 122.7 125.1 124.5

euro-$ (annual average) 1.47 1.39 1.33 1.39 1.28 1.32 1.27 1.20

euro-£ (annual average) 0.79 0.89 0.86 0.87 0.81 0.85 0.84 0.81

CPI inflation 4.0 -4.5 -0.9 2.6 1.7 0.5 1.4 2.0


Table A.4UK key indicator forecasts


UK forecasts (annual % growth unless stated)

2008 2009 2010 2011 2012 2013 2014 2015

GDP -0.8 -5.2 1.7 1.1 0.1 1.4 2.4 2.6

Private consumption -1.0 -3.6 1.0 -0.4 1.2 1.6 1.9 2.2

Government consumption 2.1 0.7 0.5 0.0 1.7 0.2 -0.5 -0.6

Investment -6.9 -16.7 2.8 -2.4 0.9 -3.1 6.5 8.2

Exports 1.1 -8.7 6.7 4.5 1.0 2.5 5.3 5.9

Imports -1.7 -10.7 7.9 0.3 3.1 0.9 3.5 5.4

Employment 0.7 -1.6 0.2 0.5 1.2 1.1 1.2 1.1

ILO unemployment (000s) 1,783 2,390 2,476 2,564 2,548 2,492 2,370 2,234


Public sector net borrowing (% GDP) 5.1 11.2 10.0 7.9 6.2 5.9 6.1 4.7

General government gross debt stock (% GDP) 47.1 61.8 74.4 80.7 86.4 87.8 90.7 92.2

£-$ (annual average) 1.85 1.57 1.55 1.60 1.59 1.56 1.55 1.53

£-euro (annual average) 1.26 1.12 1.17 1.15 1.23 1.18 1.19 1.24

CPI inflation 3.6 2.2 3.3 4.5 2.8 2.6 2.0 1.8


Table A.5NI key indicator forecasts


NI forecasts (annual % growth unless stated)

2008 2009 2010 2011 2012 2013 2014 2015

GVA -1.7 -5.1 1.5 0.7 -1.0 1.0 2.0 2.0

Employment 1.4 -2.6 0.0 -2.8 -2.1 0.6 0.3 0.3

ILO unemployment (000s) 37 52 59 62 64 66 65 65


£-$ (annual average) 1.85 1.57 1.55 1.60 1.59 1.56 1.55 1.53

£-euro (annual average) 1.26 1.12 1.17 1.15 1.23 1.18 1.19 1.24

CPI inflation 3.6 2.2 3.3 4.5 2.8 2.6 2.0 1.8


Employment change (000s) % change

1990 - 2000 2000 - 2008 2008 - 2013 2013 - 2023 2013 - 2023

Agriculture, forestry and fishing -27 -11 -31 -15 -18.1%

Industry 59 -27 -54 22 9.1%

Construction 86 78 -132 51 47.2%

Services 397 392 -45 167 11.6%

Distribution and retail 84 71 -37 45 16.4%

Transport and storage 29 15 -2 18 19.4%

Accommodation and food services 43 21 -7 13 10.3%

Information and communications 22 10 13 25 30.0%

Financial services and real estate activities 34 32 -3 25 23.8%

Professional, scientific and technical services 40 36 -11 31 29.5%

Administration and support services 26 27 -11 22 33.3%

Public administration 16 25 -9 -12 -13.0%

Education 31 39 1 -1 -0.7%

Health and social care 42 89 23 -5 -2.0%

Other services 29 27 -1 7 6.7%

Total 515 431 -263 225 12.0%

Table A.6ROI sector employment

Source: CSO, EY Economic EyeData relates to people based measure of employment



1990 - 2000 2000 - 2008 2008 - 2013 2013 - 2023 2013 - 2023

Agriculture, forestry and fishing -13 3 -8 1 1.9%

Industry -2 -21 -13 -5 -5.6%

Construction 6 15 -18 5 9.2%

Services 108 97 -19 31 4.9%


Transport and storage 4 5 -2 3 10.5%

Accommodation and food services 17 6 -3 4 7.7%

Information and communications 8 4 -1 3 14.3%


Professional, scientific and technical services 10 7 0 6 19.0%

Administration and support services 10 18 -1 10 21.1%

Public administration 1 -3 -3 -6 -10.0%

Education 8 5 -1 -3 -4.7%

Health and social care 17 22 1 1 1.0%

Other services 3 3 2 5 14.1%

Total 99 94 -58 31 3.8%

Table A.7NI sector employment

Source: ONS, LFS, EY Economic EyeData relates to people based measure of employment



1990 - 2000 2000 - 2008 2008 - 2013 2013 - 2023 2013 - 2023

Agriculture, forestry and fishing -120 -1 -29 -32 -9.0%

Industry -1063 -1156 -146 -312 -10.4%

Construction -262 382 -293 266 13.2%

Services 2118 3143 787 2412 8.9%


Transport and storage -9 143 63 177 11.2%

Accommodation and food services 140 206 50 219 10.7%

Information and communications 305 80 104 156 11.8%


Professional, scientific and technical services 273 514 275 578 22.3%

Administration and support services 541 446 59 522 20.2%

Public administration -137 102 -172 -154 -10.0%

Education 183 391 143 -112 -4.1%

Health and social care 332 664 405 70 1.7%

Other services 189 223 -49 306 17.2%

Total 674 2368 319 2334 7.2%

Table A.8UK sector employment

Source:ONS, LFS, EY Economic EyeData relates to people based measure of employment


Notes

About Oxford EconomicsOxford Economics was founded in 1981 to provide independent forecasting and analysis tailored to the needs of economists and planners in government and business. It is now one of the world’s leading providers of economic analysis, advice and models, with over 300 clients including international organizations, government departments and central banks around the world, and a large number of multinational blue-chip companies across the whole industrial spectrum.

Oxford Economics commands a high degree of professional and technical expertise, both in its own staff of over 70 professionals based in Oxford, London, Belfast, Paris, the UAE, Singapore, New York and Philadelphia, and through its close links with Oxford University and a range of partner institutions in Europe and the US. Oxford Economics’ services include forecasting for 190 countries, 85 sectors, and over 2,500 cities subregions in Europe and Asia; economic impact assessments; policy analysis; and work on the economics of energy and sustainability.

The forecasts presented in this report are based on information obtained from public sources that we consider to be reliable but we assume no liability for their completeness or accuracy. The analysis presented in this report is for information purposes only and Oxford Economics does not warrant that its forecasts, projections, advice and/or recommendations will be accurate or achievable. Oxford Economics will not be liable for the contents of any of the foregoing or for the reliance by readers on any of the foregoing.

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