Presentation is loading. Please wait.

Presentation is loading. Please wait.

The Economic Outlook October 2011 Oliver Mangan Economic Research Unit AIB Global Treasury.

Similar presentations

Presentation on theme: "The Economic Outlook October 2011 Oliver Mangan Economic Research Unit AIB Global Treasury."— Presentation transcript:

1 The Economic Outlook October 2011 Oliver Mangan Economic Research Unit AIB Global Treasury

2 PART I The Global Economy

3 3 Global PMI leading indicator falls indicating slowing growth– not at recession levels (yet?) Global Purchasing Managers Index (reading above 50 indicates growth in GDP)

4 4 But fears of a double-dip recession A recession caused by a financial/banking crisis is generally followed by a weak recovery in activity…deleveraging by households and banks Moderate, uneven growth in developed economies since recovery began in mid-2009 – credit still tight, private sector spending remains very weak Recovery has lost momentum this year, with growing fears of a double-dip recession, especially if euro-debt crisis worsens Marked rise in inflation on higher commodity prices, fiscal and monetary tightening as well as euro debt crisis all dampen activity in 2011 Earthquake pushed Japan back into recession in H1 2011, and hit GDP growth in many economies in Q2 Key point is that private demand not picking up baton as fiscal stimulus ends Furthermore, fears about a sovereign debt default leading to worries about banks bond holdings and impacting on financial flows and funding Weak growth, fiscal and financial linkages could feed off each other- debt worries, weaker banks, less lending, slower growth, more fiscal cuts…… Hope is that recession can be avoided, helped by fall in interest rates, lower inflation, further US fiscal stimulus, rebound in Japan and actions to ease problems in euro debt markets

5 5 IMF downgrades world growth forecasts GDP (Vol % Change) (f)2012(f) World Advanced Economies US Euro Area UK Source: IMF World Economic Outlook Sept 2011 IMF cuts growth forecasts in advanced economies by % for after a serious of shocks cause recovery to slow GDP growth of around 1.5% this year in US and euro area and staying subdued in 2012 IMF says even these weaker forecasts count on a lot going well and growth could be much lower given the clear downside risks

6 6 Interest rates to remain very low into 2013

7 7 The eurozone debt crisis Problems in Greece are extreme and need to be ring fenced – only Greek debt needs to be restructured But nearly half of the 6.5tr in euro gov debt shows signs of stress However, overalll eurozone deficit and debt levels lower than in the other major economies and euro remains a strong currency Important that Italy and Spain can continue to fund at reasonable rates EU institutions need to give whatever support is required to Italian and Spanish debt markets to avoid a financial crash ECB playing a keep role and the scope of the EFSF is being expanded More and more sovereign debt winding up in the hands of EU institutions – risk moves from private sector to EU taxpayers The crisis has revealed major fault lines in the single currency – narrow role of ECB, no common bond market, poor fiscal oversight, competitiveness issues, boom and bust cycles Euro break up would be very dangerous as it could trigger a global financial and economic crisis on a par with a depression Logistically impossible to break up euro in any sort of orderly fashion – fx rates had to fixed well ahead of euros introduction to allow smooth launch

8 PART II The UK Economy

9 9 Sharp weakening in UK growth – economy has almost stalled. CPI way above 2% target on tax hikes and oil

10 10 UK : Q-o-Q Growth Rates Source: National Statistics Office, Thomson Datastream

11 11 UK consumer spending now declining year-on-year, despite falling savings ratio

12 12 Sterlings sharp fall does not result in any lasting improvement in the UK trade deficit

13 13 UK house price inflation turns negative again while activity levels remain very subdued

14 14 Sharp fall in UK PMIs especially manufacturing

15 15 UK economy still facing many headwinds Household spending weighed down by many factors, in particular high inflation, high unemployment, low wage growth, weak consumer confidence and higher savings Credit conditions remain tight Sharp fiscal tightening amounting to 8% of GDP Housing market remains very weak High inflation and rising unit wage costs making economy less competitive International slowdown to weigh on manufacturing and exports Economy to grow by 1% in 2011 and 1.5% in 2012 – helped by Olympics next year MPC mulling further quantitative easing and likely to move on this before long But policy options limited with rates very low, budgetary policy constrained and sterling already a weak currency


17 17 Irish economy rebounds in H GDP rose by 1.9% s.a. in Q1 and 1.6% in Q after a fall of 0.4% in GNP has risen in five of the last six quarters; 2.6% above trough by Q However, domestic sector remains weak, with consumer and government spending as well as construction activity all set to decline again in 2011 Decline in business investment, though, appears to be over Signs that we are approaching the bottom of the sharp fall in housing output too, with marked slowing in rate of decline in house completions this year Exports continue to perform strongly, rising by 3.1% s.a. in Q1 and 1% in Q2 Balance of payments moves into surplus; (2010 saw the first surplus since 1999) Employment continues to contract but at a slower pace. Fell by 0.2% in Q Levelling off in unemployment since Q at around 300,000 level. Monthly Live Register range bound since May last year. Redundancies in marked decline. Irish HICP rate remains very low at 1%, while earnings still in decline in H Public finances are running in line with target year to date on both the spending and revenue sides. On course to meet the 10% budget deficit target for 2011

18 18 GDP starts to recover and BoP moves into surplus

19 19 Exports lead Ireland out of recession Ireland small but very open economy - exports equated to 96% of GDP last year Exports provided Ireland with a way out of the recession – exports rose by 6.3% in 2010 and up 5.5% yoy in H Net exports added 3.5% to GDP in 2009 and 3.7% in 2010 Overall, GDP fell by 0.4% in 2010, much smaller than the declines of 7% in 2009 and 3% in 2008 Indeed, excluding housing, GDP rose by 1.3% in 2010, with same rate expected in 2011 also, reflecting strong exports Most forecasts are for GDP to grow by between 0.5-1% in 2011, with net exports adding 3.3% to GDP GDP growth forecast at 1.5-2% in 2012, assuming the major economies avoid recession

20 20 Domestic demand still contracting Deleveraging by households and banking sector, major fiscal tightening and construction slump all weighing on domestic economy Construction investment big negative drag on GDP growth, taking 11.5% off real GDP over period Smaller decline in housing output in 2011 as its now nearing bottom of cycle Business investment looks to have troughed Real government spending on goods & services to decline by 12.5% in Contracting employment and falling wages saw consumer spending decline by 0.8% in 2010 and it fell by over 2.5% in H Domestic spending to contract by around 4% in 2011 after declines of 5.8% in 2010 and 11.8% in Domestic spending forecast to fall by some 1% in 2012 but to grow from 2013 onwards

21 21 But drag from domestic demand abating

22 22 Labour market beginning to stabilise (f)2012(f)2013(f) Unemployment Rate % (average) Labour Force Growth % Employment Growth % Net Immigration : Year to April (000) Source: CSO and AIB ERU forecasts Big easing in the pace of job losses since early 2010 as economy stabilises and improves Unemployment levels off in last 18 months on fall in redundancies and pick up in emigration Live Register largely range bound since May 2010, another sign of stabilising labour market Unemployment should start to edge downwards from 2013 as growth picks up and jobs market improves

23 23 Positive adjustments to support economic recovery Household savings have risen sharply from lows Restructured banking system to be focused on supporting Irelands economy Housing affordability is now back to best levels since pre-1996 i.e. before the boom Limited overhang in new housing market Contraction in construction activity should have largely run its course by end 2011 Irish inflation rate remains well below UK and is the lowest rate in the EU Sharply falling unit wage costs (-8.7% in ) helping competitiveness Exports growing strongly as Ireland refocuses on FDI and foreign trade BoP has moved into surplus

24 24 % change in real terms unless stated (f)2012(f)2013 (f) GDP GNP Personal Consumption Government Spending Fixed Investment Contribution of stocks to GDP growth (%) Domestic Demand (inc stocks) Exports Imports HICP (%) Personal Savings ratio (%) Construction Investment as % GDP BoP Current A\C as % GNP Source: CSO, AIB ERU Forecasts AIB Irish Economic Forecasts

25 25 Budget figures made worse by treatment of banking costs Treatment of banking recapitalisation greatly boosted Gov. deficit/debt figures in 2010 Actual or underlying deficit and debt figures were much lower, as set out in table below The actual national debt ratio stood at 60.7% of GDP at end 2010 and should top out at around 90% of GDP in Public finance figures on target in past two years with the key aim being to get the budget deficit down below 3% of GDP by 2015 % of GDP (f)2012(f)2013(f)2014(f)2015(f) General Gov Deficit * Gross General Gov Debt Actual National Debt** *To comply with Eurostat rules, the Gen Gov deficit and debt figures in 2010 include the cost of capital injections into banks via promissory notes (some 20.5% of GDP) even though these funds are to be put in over the next 10 years and not in Thus, the underlying Gen Gov deficit in 2010 is 12% of GDP. ** The actual National Debt provides for bank promissory notes, not in 2010, but as funded each year by Exchequer (3.1bn from 2011 onwards). Also assumes 8 billion in fresh bank capital injection by the Exchequer this year following the March 2011 PCAR exercise. It also nets off cash balances (16 billion). The National Debt stood at 93.5 billion at end Source: Dept of Finance (for Gen Gov data and forecasts); NTMA (historic) and AIB ERU (forecasts) for National Debt

26 26 Key fiscal indicators challenging but surmountable

27 27 Irish bond yields fall sharply even though euro debt crisis escalates Sharp fall in Irish bond yields since the mid- July Euro Group summit which saw a marked improvement in the Irish bailout terms Marked outperformance compared to Greece and Portugal Irish bond rally has occurred despite renewed severe sovereign debt pressures in Greece and difficulties in Italian and Spanish markets Recognition by market that Irish funding needs are covered until end 2013 Major progress in resolving banking crisis as balance sheets cleansed and capital ratios boosted by large capital injections Irish exports performing well with the balance of payments now in surplus Economy has started to grow as exports provide the route out of recession Public finances on target with very positive quarterly assessments by the Troika

28 28 Ireland clearly different to Club Med countries Ireland now running a surplus on the balance of payments in contrast to the continuing big current account deficits in Spain, Portugal, Italy & Greece Ireland as a nation is now a net lender unlike the Club-Med countries Exports are an enormous part of the Irish economy at close to 100% of GDP and growing strongly, which is now more than offsetting weak domestic demand Club Med countries have a small export base so difficult for them to emerge from recession with domestic demand contracting Irish economy much more flexible than Club-Med and has made major painful adjustments to correct the imbalances in the economy Ireland has undergone a large real internal devaluation, with a 14% fall in unit wage costs relative to other industrialised countries over HICP fell by 3.3% in Ireland in 2009/10 in contrast 6% rise in Greece, 1.8% in Spain and 0.5% in Portugal. Ireland has the lowest HICP (1%) in EU at present Irish funding needs catered for until end 2013 under its IMF/EU bail-out deal. Not so in Portugal and Greek bail-out deal running into difficulties.

29 29 Risks to the prospects for an Irish economic recovery The marked slowdown in the recovery in the international economy which has seen a fall in Irish PMI indicators recently and could hit exports Marked weakness of Irish consumer spending- sharp fall in H probably in response to severe 2011 budget and concerns over further fiscal tightening Scale of balance sheet repair by households, which is a new phenomenon for Ireland and thus difficult to estimate its speed, breath and duration Low levels of consumer confidence Continuing credit contraction - need to get bank lending moving again Ongoing sharp fall in house prices and very low levels of market turnover despite favourable affordability conditions Even deeper budgetary cuts than currently envisaged Contagion effects from ongoing crisis in peripheral eurozone debt markets Lack of access to market funding for sovereign and banks despite ample domestic savings – Ireland Inc. is a net lender but cant borrow on markets

30 30 Note: All Irish data in tables are sourced from the CSO unless otherwise stated. Non- Irish data are from the IMF, OECD and Thomson Financial. Irish forecasts are from AIB Economic Research Unit. This presentation is for information purposes only and is not an invitation to deal. The information is believed to be reliable but is not guaranteed. Any expressions of opinions are subject to change without notice. This publication is not to be reproduced in whole or in part without prior permission. Allied Irish Banks p.l.c. is regulated by the Central Bank of Ireland. Economic Research Unit

Download ppt "The Economic Outlook October 2011 Oliver Mangan Economic Research Unit AIB Global Treasury."

Similar presentations

Ads by Google