Neil GibsonDirector of Regional Services

Oxford EconomicsJune 2009

The recession, the recovery and the response

2

Forecasters – not their finest hour!

The depth of the global recession has been a shock to almost all - including forecasters

Should we have seen it coming? In some areas yes – over-valued house prices, over reliance on

construction and retail sectors, exchange rate, tax revenue / government spend over-dependence on construction, exposure to global demand and FDI

Why did models not fully warn us? ‘Hidden’ / lacking data and limited knowledge of banking problems, globally

and nationally Extent to which debt underpinned growth was not fully explored – e.g. in

construction and retail Uncertainty over the timing and scale of asset price changes – e.g. house

prices Confidence and sentiment are hard to predict but have an excessively

large impact The scale of fiscal and monetary interventions would have been expected,

all other things being equal, to have had some effect by now (they may yet)

3

Overview

The recession – the regional impactThe recovery – where and when?The response – government approachSummary – questions from an

economist

The recession – the regional impact

5

All the world affected

-4

-3

-2

-1

0

1

2

3

4

5

6

1996 1998 2000 2002 2004 2006 2008 2010 2012

Source: Oxford Economics

World: GDP growth% year

Forecast

2008 2009 2010 2011-18 (pa)

Real GDP

North America

United States 1.1 -3.0 1.2 3.3

Canada 0.4 -2.5 1.6 3.8

Europe

Eurozone 0.6 -4.7 -0.1 2.2

Germany 1.0 -6.3 0.1 2.1

France 0.3 -3.3 -0.2 1.9

Italy -1.0 -5.2 -0.2 1.8

Ireland -2.3 -8.9 -0.8 3.5

UK 0.7 -4.1 0.1 3.1

EU27 0.8 -4.1 0.1 2.5

Asia

Japan -0.7 -6.1 0.9 1.8

Emerging Asia 6.2 2.3 5.9 7.3

China 8.9 6.5 8.5 8.8

India 7.5 5.0 6.5 8.1

World 1.8 -2.7 1.8 3.8

Summary of International Forecasts

6

Recessions have many impacts…

Consumers

FinancesSpenders

and savers

Leavers from education

Job loss

Recession

Governments

Spending

StrategyFinancing projects

Governance

Businesses Society

Start - up

Advertising / marketing

Downsizing / layoffs

Closing

Environment

CrimeHousing

PressBenefits

PsychologyImage &

physical space

7

What caused it?

In summary■ Debt■ Confidence■ Complacency

Essentially the rapid escalation of financial sector debt (and personal sector debt in some countries) unwound when uncertainty over the asset values arose

Spectacular collapse in confidence, liquidity and valuations (plus the Lehman’s collapse) left financial world close to collapse

World ‘bail out’ (largely) to avoid deep recession and stabilise spending

Now a legacy of scarred consumers, nervous business and indebted governments (in West) makes outlook fragile

8

Overview of the regional impacts

GrowthJobsWorklessMigrantsSpending / prices

9

London and industrial Midlands hit hardest

GVA growth by region

2008 2009 20102011-19

(pa)

South East 1.1 -3.3 0.0 3.2London 2.6 -4.5 -0.3 3.8Eastern 0.0 -4.2 0.3 3.3South West 1.2 -3.6 0.8 3.0West Midlands 0.2 -4.5 0.6 2.7East Midlands -1.7 -4.6 0.3 2.7Yorkshire and Humber -0.4 -4.0 0.9 2.7North West 0.1 -4.1 0.9 2.7North East -0.5 -4.1 0.6 2.5Wales -0.9 -4.1 0.7 2.5Scotland 1.8 -3.5 0.3 2.8Northern Ireland 0.8 -3.5 0.7 2.9UK 0.8 -4.0 0.3 3.1

Source: Oxford Economics

10

Job loss for all

Employment change by region, 2008-10

-400

-350

-300

-250

-200

-150

-100

-50

0

Lond

on

East M

idlan

ds

Easte

rn

Wes

t Midl

ands

South

Eas

t

Scotla

nd

North

East

North

Wes

t

Wale

s

Yorks

hire

and H

umbe

r

South

Wes

t

Northe

rn Ir

eland

00

0s

-8

-7

-6

-5

-4

-3

-2

-1

0

%

000s

%

Source: Oxford Economics

11

A fall in migration expected

2007 2008 2009South East 45 45 38London -31 -16 -39Eastern 40 27 13South West 51 49 39West Midlands -1 2 -3East Midlands 24 20 7Yorkshire and Humber 20 22 16North West -1 3 2North East 6 6 3Wales 12 13 10Scotland 26 24 11Northern Ireland 10 6 3UK 201 200 100

Source: NOMIS / Oxford Economics

Total migration by region, 2007-09

12

Long term population below official outlooks

Population projections, 2018

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

20000

South

Eas

t

Lond

on

Easte

rn

South

Wes

t

Wes

t Midl

ands

East M

idlan

ds

Yorks

hire

and

Humbe

r

North

Wes

t

North

East

Wale

s

Scotla

nd

North

ern

Irelan

d

00

0s

Official

Oxford Economics

Source: Oxford Economics / GAD

13

Unemployment rising in all 434 LA’s

0

5

10

15

20

25

30

35

40

45

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0

pp change last 12 months

UK: Local authority unemployment changeFrequency

pp changeCorby 3.8Wear Valley 3.5Walsall 3.5Swindon 3.5Blaenau Gwent 3.5Kingston upon Hull 3.4Redditch 3.4Merthyr Tydfil 3.4Cannock Chase 3.3Limavady 3.3

pp changeIsles of Scilly 0.2Orkney Islands 0.5Ceredigion 0.6Eden 0.7Shetland Islands 0.7South Lakeland 0.8Ribble Valley 0.8City of London 0.8Aberdeenshire 0.8Moray 0.9

Source: NOMIS / Oxford Economics

14

Highest rise in weakest labour markets

y = 1.9742x + 0.0869

R2 = 0.6631

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0

Unemployment pp change last 12 months

Un

emp

loym

ent

rate

, M

ay 0

9

Corby

Blaneau Gw ent

Hull

Magherafelt

Tow er Hamlets

Isles of Scilly

Source: NOMIS / Oxford Economics

15

Huge variation in export concentrations

Production exports (%)

Services exports (%)

Total exports (%)

Pembrokeshire 0.8 12.3 13.1Blackpool 0.2 12.5 12.7Rhondda, Cynon, Taff 1.0 11.6 12.6Gwynedd 1.2 11.1 12.3Ribble Valley 2.1 10.2 12.3Scarborough 1.8 10.5 12.2Pendle 0.4 11.7 12.1Denbighshire 0.4 11.4 11.8Torfaen 0.4 10.5 11.0Blaenau Gwent 0.1 8.1 8.2

Source: ABI / NOMIS / Oxford Economics

Note: Production exports indcludes agriculture and manufacturing. Services includes proportions of transport and commerce and proffesional services. Figures are expressed as a % of total employment

Production exports (%)

Services exports (%)

Total exports (%)

City of London 0.0 75.7 75.7Tower Hamlets 0.8 53.3 54.2Hillingdon 0.4 51.0 51.4Islington 0.1 51.1 51.2Crawley 0.8 49.4 50.2Hart 0.8 45.0 45.8Suffolk Coastal 14.8 30.6 45.4Southwark 0.4 43.4 43.8Woking 0.8 41.3 42.1Camden 0.7 39.5 40.2

Top and bottom 10 LA’s for exporting jobs, 2007

16

A decade for some to return to job and house price peaks

Returning to regional peaks

Total Employment House Prices GVA

Unemployment

South East 2014 2014 2012 NeverLondon 2014 2014 2012 NeverEastern 2015 2014 2012 NeverSouth West 2014 2015 2011 NeverWest Midlands 2020 2015 2012 NeverEast Midlands 2025 2015 2013 NeverYorkshire and Humber 2018 2013 2012 NeverNorth West 2017 2013 2012 NeverNorth East 2022 2013 2012 NeverWales 2022 2015 2013 NeverScotland 2015 2010 2011 NeverNorthern Ireland 2015 2019 2011 NeverUK 2016 2014 2012 Never

Source: Oxford Economics

17

Employment remarkable in NI

90

100

110

120

130

140

150

1981 1985 1989 1993 1997 2001 2005 2009 2013 2017

Northern Ireland

England

Wales

Scotland

Total Employment: UK countriesIndex = (1981=100)

Source : Oxford Economics

Forecast

18

Improved participation everywhere

58

60

62

64

66

68

70

72

74

76

78

1994 1998 2002 2006 2010 2014 2018

Scotland

England

Wales

Northern Ireland

Resident employment rate: UK countries%

Source : Oxford Economics

Forecast

19

Unemployment – a lasting legacy

0

2

4

6

8

10

12

14

16

18

1981 1985 1989 1993 1997 2001 2005 2009 2013 2017

Wales

Northern Ireland

England

Scotland

Unemployment rate: UK countries%

Source : Oxford Economics

Forecast

The recovery – where and when?

21

Where will lead the recovery?

-1000 -500 0 500 1000 1500

Agriculture

Extraction

Manufacturing

Utilities

Construction

Retail

Hotels

Transport and communications

Financial services

Business services

Public administration

Education

Health

Other personal services

UK: Employment change by sector000s

Source : Oxford Economics

0

100

200

300

400

500

600

South

Eas

t

Lond

on

Easte

rn

South

Wes

t

Wes

t Midl

ands

East M

idlan

ds

Yorks

hire

and

Humbe

r

North

Wes

t

North

Eas

t

Wale

s

Scotla

nd

North

ern

Irelan

d

UK regions: Total employment change000s

Source : Oxford Economics

UK employment change by sector and by region, 2010 - 20

22

And so to green?

Green jobs touted as key■ What market?

■ What type of jobs?

■ Displacement (building green not grey houses)

Lifestyle sectors vulnerable or now key? Is the financial and professional services sector broken (no – but

different) Could on-shoring of industrial jobs occur (unlikely to great extent – but

possible with sharp oil price rises) Jobs related to care for the elderly likely Advanced skilled jobs (STEM, arts and design etc.) as harder to

replace Could there be a re-birth in academia? Tourism (relations with emerging nations important)

The response – government approach

24

Still an era of debt (from consumers to govt)

ROI and UK public finances outlook

Note no NI budget – a telling difference

2009 2010 2011 2012 2013

Ireland (Govt budget balance % GDP)Oxford Economics -10.0 -10.0 -8.6 -7.3 -5.9Department of Finance (April 2009) -10.8 -10.3 -8.5 -5.5 -3

UK (PSNB % GDP)Oxford Economics -11.6 -11.5 -10.4 -7.6 -5.9HM Treasury (April 2009) -12.4 -11.9 -9.1 -7.2 -5.5

Source: Ireland Department for Finance, HM Treasury, Oxford Economics

In some ways, ‘hands are tied’

25

Devolved governments (NI)

Disconnect with the ‘balance sheet’ of recession Benefits, social security not a true cost in NI – a big problem Lack of tax controls In principle closer to personal impact and thus potentially quicker

to respond In practice (NI) acting departmentally but political decisions

limited (Invest NI initiatives, DEL schemes – there are things happening)

The recession will necessitate hard choices (water charges, rates)

So far, appetite limited Longer recession tail through PE squeeze – could this bring

about a desired change though? A real test for coalition government

26

The key recession risks…

Leavers from education: ‘lost generation’? Laid off workers (skills mismatch) A new era of decay (especially cities)?

■ Job loss■ ‘Benefit locked’ migrants■ ‘property locked’ migrants■ Crime

Incomplete regeneration■ Disused sites■ Unfinished buildings, developments, housing estates■ No longer viable cultural and leisure activities■ PPP, funding etc.

Housing offer■ Limited new build■ Price falls welcome, but could rise sharply and become unaffordable again■ Skills and young people crisis – what jobs?

Will the sectors of recent growth return? Cycle of fear and retraction Impact on ‘pension pots’ and retirement

The biggest costs are personal – they can

last a lifetime

27

Short and Long term implications

Short term Significant job loss painful Personal costs high Limited opportunities for education

leavers Availability of finance at a premium No area / sector / class excluded Front page news (good and bad!) Impact on government, business,

consumers alike – a change in behaviour

Resource pressures (and public scrutiny) on public sector

Targets missed Strategies redundant (?) Wage inflation stifled (certainly in

private sector)

Long term Saving patterns Unemployment higher Migrant flows Natural increase rates (?) House price Public finances Rates Prices down (for how long?) Psychology Regulation, ‘bust / boom’ monitoring Exchange rates will rise again Oil prices will rise again

Summary – Questions from an economist

29

Questions to consider

Is the Northern Ireland data telling us the recession is worse than models suggest?

What can be done for current school / education leavers? What can those laid off be retrained in? Do we really understand the ‘costs’ of benefits? Do we really know what the so called ‘professional services

sector’ does? Is our economic strategy (?) appropriate in this environment? Do we have a plan for real cuts in PE? Do we know what powers we should appeal for in a devolved

government?

Any questions?

31

Contact:Neil GibsonDirector Regional Services, Oxford EconomicsTel: 028 9266 0669Mob: 07803728994 Email: ngibson@oxfordeconomics.com

Annex A: Detailed regional forecasts

33

Employment by regional group - South

90

100

110

120

130

140

150

1981 1985 1989 1993 1997 2001 2005 2009 2013 2017

South East

Eastern

South West

London

Total Employment: Southern regionsIndex = (1981=100)

Source : Oxford Economics

Forecast

34

Employment by regional group – Midlands and North

90

95

100

105

110

115

120

125

130

1981 1985 1989 1993 1997 2001 2005 2009 2013 2017

East Midlands

Yorkshire andHumberWest Midlands

North West

North East

Total Employment: Midlands and Northern regionsIndex = (1981=100)

Source : Oxford Economics

Forecast

35

Unemployment - South

0

50

100

150

200

250

1981 1985 1989 1993 1997 2001 2005 2009 2013 2017

London

Eastern

South East

South West

Unemployment: Southern regionsIndex = (1981=100)

Source : Oxford Economics

Forecast

36

Unemployment – North and Midlands

0

20

40

60

80

100

120

140

160

1981 1985 1989 1993 1997 2001 2005 2009 2013 2017

East Midlands

Yorkshire and Humber

West Midlands

North West

North East

Unemployment: Northern and Midland regionsIndex = (1981=100)

Source : Oxford Economics

Forecast

37

Resident employment rate - South

60

65

70

75

80

85

1994 1998 2002 2006 2010 2014 2018

Eastern

South East

South West

London

Resident employment rate: Southern regions%

Source : Oxford Economics

Forecast

38

Resident employment rate – Midlands and North

56

58

60

62

64

66

68

70

72

74

76

78

1994 1998 2002 2006 2010 2014 2018

East Midlands

West Midlands

North West

Yorkshire and Humber

North East

Resident employment rate: Northern and Midland regions%

Source : Oxford Economics

Forecast