1

April 2013 Oliver Mangan Chief Economist AIB

The Irish Economic Update – Continuing Very Robust Growth January 2016

aibeconomicresearch.com

2

Many indicators pointing to very robust growth

-10.0

-7.5

-5.0

-2.5

0.0

2.5

5.0

7.5

10.0

Q12006 Q12007 Q12008 Q12009 Q12010 Q12011 Q12012 Q12013 Q12014 Q12015

IrishGrowthRates(YoY%,3QuarterMovingAvg.)

Source:CSO

GNP

GDP

-20

-15

-10

-5

0

5

10

15

Oct-05 Oct-07 Oct-09 Oct-11 Oct-13 Oct-15

IndustrialProduction(ExcludingModernHigh-TechSector)

Year-on-Year,3mthmovavg(%) Source:CSOviaThomsonDatastream

%

20

40

60

80

100

120

Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Nov-13 Nov-14 Nov-15

Consumer Confidence (ESRI - KBC)

Source: ESRI - KBC, Thomson Datastream

30

35

40

45

50

55

60

65

70

Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15

IrelandMfgandServicesPMIs

Source:ThomsonDatastream,Investec

Services

Manufacturing

3

Labour market improves – strong jobs growth

Year Average 2012 2013 2014 2015(f) 2016(f) 2017(f)

Unemployment Rate % 14.7 13.1 11.3 9.3 8.0 7.0

Labour Force Growth % -0.6 0.4 -0.3 0.5 1.0 1.4

Employment Growth % -0.6 2.4* 1.7 2.7 2.5 2.5

Net Emigration : Year to April (‘000) 34.4 33.1 21.4 11.6 5.0 0.0

Source: CSO and AIB ERU forecasts *Note: Employment ex Agriculture +1.3% in 2013

-12

-10

-8

-6

-4

-2

0

2

4

6

Q1 2009 Q1 2010 Q1 2011 Q1 2012 Q1 2013 Q1 2014 Q1 2015

Employment (% Chg YoY)

Source: CSO

Public

Total

Private

4

6

8

10

12

14

16

Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Nov-13 Nov-14 Nov-15

Unemployment Rate (%)

Source: Thomson Datastream

4

Impressive performance by exports

§  Ireland a very open economy – exports, driven by huge FDI, equated 114% of GDP in 2014

§  Major gains in Irish competitiveness since 2009

§  Exports rise strongly helped by large FDI inflows and recovery in global economy

§  Euro weakness gives additional boost to exports. Up by some 20% in value (13% in volume) in 2015

-14 -12 -10 -8 -6 -4 -2 0 2 4 6 8 10 12 14

Germany

France

Italy

Eurozone

UK

Ireland

Spain

Portugal

Unit Labour Costs 2009-2013 (% Change)

Source: EU Commission

0 10 20 30 40 50 60 70 80 90 100 110 120

Spain

Portugal

Ireland

Italy

France

Germany

UK

Finland

Exports as % of GDP 2014

Source: Thomson Datastream

-5

0

5

10

15

Q32005 Q32006 Q32007 Q32008 Q32009 Q32010 Q32011 Q32012 Q32013 Q32014 Q3-2015

IrishExportsofServices(Volume,3QtrMovingAverage,YoY%Change)

Source:CSO

5

Strong rebound by domestic economy

§  Domestic economy contracted by 20% from 2008-12

§  Collapse in construction was big drag on GDP - fell from 13.5% of GDP in 2005-07 to 5.3% by 2012

§  Construction has picked up – moderate recovery in place since 2013 but sector still very subdued

§  House building also picks up but still at very low levels

§  Business investment (ex planes/R&D) up by 25% to Q3 2015 after growth of 33% in 2014

§  Total investment (ex planes, R&D) up 12% to Q3 2015 after 18% rise in 2014, despite subdued construction

§  Core domestic spending (ex planes, R&D) rose by 2.3% in 2013, 4.7% in 2014 and 4.5% to Q3 2015

§  Consumer spending grew by 2% in 2014 and 3.5% to Q3 2015 – but spending on services still very weak

§  Core retail sales (ex cars) up estimated 6.5% in 2015

§  New car sales rose by 30% in 2015 – same growth rate as in 2014

-9

-7

-5

-3

-1

1

3

5

7

9

Q12008 Q12009 Q12010 Q12011 Q12012 Q12013 Q12014 Q12015

IrishRetailSales(exautos)(Volume, YoY, %)

Source:ThomsonDatastream

-15.0

-12.0

-9.0

-6.0

-3.0

0.0

3.0

6.0

9.0

Q3 2008 Q3 2009 Q3 2010 Q3 2011 Q3 2012 Q3 2013 Q3 2014 Q3 2015

CoreDomesticSpending*(3QtrMA,%Yr-on-Yr)

Source: CSO, AIB ERU Calculations*Domestic Spending excluding investment in R&D and planes

6

House prices rise as shortages emerge in market

§  Housing output fell by 90% but now past the bottom of cycle

§  Bulk of the new housing stock overhang eliminated

§  House prices declined sharply – fell by over 50% between their peak in late 2007 and early 2013

§  House prices recovering: up 35% by Nov 2015 from low in early 2013 as housing shortage emerges

§  Dublin prices up by 51% and non-Dublin prices up by 24.5% from their troughs

§  House prices, though, including in Dublin, are still some 34% below peak level hit in 2007

§  New Central Bank mortgage rules have cooled Dublin house price inflation – falls from 25% to 3% yoy

§  Nationally, prices up 6.5% yoy in Nov 2015, with higher rises outside Dublin – up almost 10% yoy

§  Rents have rebounded – up over 36% from lows and now 1% above previous peak reached in 2008

-30

-20

-10

0

10

20

30

-3

-2

-1

0

1

2

3

Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Nov-13 Nov-14 Nov-15

NationalHousePriceInflation

Month-on-month:LHS Year-on-Year:RHS Source:CSOviaThomsonDatastream

% %

40

60

80

100

120

140

Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Nov-13 Nov-14 Nov-15

IrishResidentialPropertyPriceIndices(Base100=Jan'05)

NationalPrices Ex-DublinPrices DublinPrices Source:CSOviaThomsonDatastream

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House building rising slowly from very depressed levels

§  Housing completions at 11,000 in 2014, up from 8,300 in 2013. Set to rise to some 12,500 in 2015

§  House building still at very low levels. Way below previous peak of near 90,000 completions

§  Demand estimated at 25,000 new units per annum

§  Good rise in new housing registrations and commencements but still at depressed levels

§  Recovery in house prices should help spur more building activity

§  Housing affordability not as issue - just below levels pertaining in 1997/98 before boom started

§  Growth in mortgage lending slows sharply during 2015 on new tighter CB lending rules

§  Main concern remains very slow pace of recovery in house building activity despite strong demand

§  Number of measures have been put in place to help boost new house building

10

14

18

22

26

30

Oct-97 Oct-99 Oct-01 Oct-03 Oct-05 Oct-07 Oct-09 Oct-11 Oct-13 Oct-15

HousingRepaymentAffordability*

Source:AIB,PermanentTSB/ESRI,CSO,Dept.of

%

*%ofdisposibleincomerequired formortgagerepaymentsfor2incomehousehold,30year90%mortgage.BasedonPermanentTSB/ESRInationalhouseprice&CSOresidentialpropertyprice

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

1998 2000 2002 2004 2006 2008 2010 2012 2014 2016(f)

Housing Completions

Source: CSO; DoEHLG and AIB ERU

8

Budget deficit falls to very low level

§  Some €30bn (18% of GDP) of fiscal tightening implemented in 2008-2014 period

§  Budgetary policy turns mildly expansionary in 2015 and 2016

§  Budget deficit of 1.5% of GDP in 2015 with a deficit of 0.5% or below likely in 2016

§  Budget surplus on the cards for 2017

§  Primary budget (i.e. excluding debt interest) already back in surplus at 1.5% of GDP

§  Debt interest costs low at some 3% of GDP

§  Gross Gov Debt/GDP ratio falling sharply. Down from 120% in 2013 to 95% in 2015

§  Irish bonds yields have fallen sharply, with five year yields of 0%, ten year at 1%

§  Sovereign debt ratings upgraded; S&P now have Ireland at A+, with Fitch at A-

-12

-10

-8

-6

-4

-2

0

2

4

2008 2009 2010 2011 2012 2013 2014 2015(f) 2016(f) 2017(f) 2018(f)

General Government Balance* (% GDP)

Sources : Dept of Finance/AIB ERU*Excludes banking recapitalisation costs in 2009-11

0

2

4

6

8

10

12

14

16

18

20

0

2

4

6

8

10

12

14

16

18

20

Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16

Irish Benchmark Yields

5Year 10Year Source:ThomsonReuters

% %

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Monetary policy to remain very accommodative

§  Very loose monetary conditions everywhere. Further widespread policy easing in 2015

§  Interest rates at historic lows of close to zero, with QE in some countries

§  Central banks forward guidance that interest rates can remain low as inflation very subdued

§  ECB has loosened monetary policy a lot since mid-2014 to counteract very low inflation

§  Eurozone & Japan continuing with QE. Further policy easing announced by ECB last month

§  No rate hikes in Eurozone or Japan for years.

§  BoE hints that rates may not start to rise in UK until 2017

§  US Fed start a gradual policy tightening process with a rate hike in December.

0

1

2

3

4

5

6

7

Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15

Official Interest Rates in the US, UK and Eurozone (%)

Fed Funds Rate

Source: Thomson Datastream

ECB Refi Rate

BoE Bank Rate

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Euro likely to remain weak in 2016

§  Euro and yen found a floor last spring after big falls in H2 2014 and early 2015.

§  Scaling back of US/UK rates hike expectations key factor in more stable FX markets since spring

§  Main FX markets range bound since then but stronger dollar/weaker euro tone evident recently

§  Dollar should be underpinned by gradual Fed rate tightening during 2016

§  Somewhat softer tone to sterling after big gains in past couple of years. UK rate hikes delayed

§  Brexit referendum needs watching. Could yet pose a problem for sterling

§  Euro likely to remain weak in 2016 given negative interest rates in Eurozone

1.00

1.05

1.10

1.15

1.20

1.25

1.30

1.35

1.40

1.45

Dec-13 Jun-14 Dec-14 Jun-15 Dec-15

Euro / Dollar Exchange RateUS$

Source: Thomson Datastream

0.68

0.70

0.72

0.74

0.76

0.78

0.80

0.82

0.84

0.86

Dec-13 Jun-14 Dec-14 Jun-15 Dec-15Source: Thomson Datastream

Euro / Sterling Exchange Rate£

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Key factors driving recovery to remain in place

§  Good pick-up in demand in key export markets, including the Eurozone

§  Big influx of new FDI leading to even bigger export base at over 110% of GDP

§  Large competitiveness gains made since 2009, with declines in wages and prices

§  Sharp decline of the euro - over 55% of exports go to outside the Eurozone

§  Very low interest rate environment which is set to last for many years

§  Fiscal policy moves from severely contractionary to mildly expansionary

§  Big fall in oil and other commodity prices sees inflation fall back to zero

§  Incomes start to grow as wages begin to rise and taxes are cut

§  Rebound in domestic economy from very depressed levels e.g. housing, car sales

§  However, not all sectors of the economy firing yet. Construction activity still at a low ebb, especially house building, and household spending on services remains weak

§  Economic conditions have not returned to normal: unemployment and emigration still high, very high taxes on income, credit contracting, very subdued construction activity

§  Recovery to date concentrated on exports, business investment and retail spending

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Economy can continue to grow strongly

§  The contraction on the domestic side of economy is well over and the sector is now expanding strongly

§  Labour market on steadily improving path

§  Construction picking up from very depressed levels

§  Fiscal tightening over, with budgetary policy now mildly expansionary

§  Major gains made on the competitiveness front – much lower CPI/ULC than elsewhere since 2009

§  Large, diversified export base performing very well

§  Ireland benefitting from the fall of euro and improvement in European growth in past two years

§  Activity supported by low interest rate environment

§  Economy has capacity to grow strongly given inflow of FDI and ample supply of skilled labour, as well as scope for sharp rebound in domestic sector

§  Irish lead indicators point to continuing strong growth

§  GDP growth of 6.5% or above in 2015

§  Ireland can grow by 4-5% in next few years

-4

-2

0

2

4

6

Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15

Irish, Eurozone & UK Inflation (HICP Rates)

Ireland

Eurozone

Source: Thomson Datastream

UK

-8

-6

-4

-2

0

2

4

6

8

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015(f)2016(f) 2017(f) 2018(f)

IrishGDPGrowth

Source:ThomsonDatastream,AIBERU

%

13

% change in real terms unless stated

2012 2013 2014 2015 (f) 2016 (f) 2017 (f)

GDP 0.2 1.4 5.2 6.5 5.0 4.5

GNP 1.6 4.6 6.9 5.0 4.5 4.0

Personal Consumption -0.8 -0.3 2.0 3.2 3.0 3.0

Government Spending -2.2 1.4 4.6 2.0 2.0 2.0

Fixed Investment 8.6 -6.6 14.3 20.0 9.5 7.0

Domestic Spending 1.0 -1.5 5.2 7.0 4.5 4.0

Exports 2.1 2.5 12.1 13.0 7.5 6.5

Imports 2.9 0.0 14.7 15.0 7.0 6.3

HICP Inflation (%) 2.0 0.5 0.3 0.0 0.5 1.5

Unemployment Rate (%) 14.7 13.1 11.3 9.3 8.0 7.0

Budget Balance (% GDP) -8.1 -5.7 -4.1 -1.5 -0.5 0.5

BoP Current A\C as % GDP -1.5 3.1 3.6 4.0 3.8 3.0

Source: CSO, AIB ERU Forecasts

AIB Irish Economic Forecasts

14

But Brexit would pose big risks for UK and Ireland

§  Referenda are unpredictable and sentiment can change quickly. Most polls show a small majority in favour of remaining in EU - the lead is narrowing. Referendum likely to be held later this year

§  The renegotiations of UK’s membership terms with EU could have big bearing on referendum

§  May not get much of a free trade agreement between UK & EU post a Brexit. UK would have to adhere to EU rules, pay EU budget contribution. EU may get more FDI by not having major trade deal

§  Likely to take two years for a country to leave the EU. No UK veto over exit terms. Full economic effects may take up a decade to materialise because of changes in trade and FDI occur over time

§  Exports account for around 30% of UK GDP with the EU taking 44% of these

§  UK is the biggest recipient of FDI in the EU. Around half comes from EU, 30% from US

§  Most studies show significant falls in GDP in UK on a Brexit.

§  Economic models may underestimate impact of Brexit on UK. Do not allow for uncertainty. Generally assume some trade agreement. What are the FDI, migration, productivity costs?

§  Brexit would have serious implications for Ireland given close economic and trade links

§  Higher trading costs from more admin, differing trade rules, possible customs posts/duties

§  Agri sector, energy, retailing, would be hit by Brexit. FDI might benefit

§  Would there be restrictions on freedom of movement, passport controls, a North/South impact

§  Watch for impact on currency also. Sterling could weaken a lot ahead of Brexit

15

Risks to the Irish economic recovery

§  Main risks to Irish recovery no longer internal but external, mainly relating to global growth

§  Recovery in the global economy still quite moderate, especially in the Eurozone, with on-going risks and headwinds. Ireland vulnerable to any shocks which would hit its exports

§  Risk of a Brexit. Would certainly be an issue for Ireland given its strong trading links with UK

§  Supply constraints in the construction sector, especially new house building, which is recovering at a very slow pace and remains at depressed levels

§  Competitiveness issues - high house prices, high rents, high personal taxes

§  High indebtedness and scale of balance sheet repair by households (mortgage debt is very high). Major deleveraging has already taken place. Difficult to estimate its duration but it has further to run as debt ratios still very high

§  Continuing credit contraction – fewer banks, tighter credit conditions, on-going deleveraging

Note: All Irish data in tables are sourced from the CSO unless otherwise stated. Non-Irish data are from the IMF, OECD and Thomson Financial. Irish forecasts are from AIB Economic Research Unit. This presentation is for information purposes and is not an invitation to deal. The information is believed to be reliable but is not guaranteed. Any expressions of opinions are subject to change without notice. This presentation is not to be reproduced in whole or in part without prior permission. In the Republic of Ireland it is distributed by Allied Irish Banks, p.l.c. In the UK it is distributed by Allied Irish Banks, plc and Allied Irish Banks (GB). In Northern Ireland it is distributed by First Trust Bank. In the United States of America it is distributed by Allied Irish Banks, plc. Allied Irish Banks, p.l.c. is regulated by the Central Bank of Ireland. Allied Irish Bank (GB) and First Trust Bank are trade marks used under licence by AIB Group (UK) p.l.c. (a wholly owned subsidiary of Allied Irish Banks, p.l.c.), incorporated in Northern Ireland. Registered Office 92 Ann Street, Belfast BT1 3HH. Registered Number NI 018800. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. In the United States of America, Allied Irish Banks, p.l.c., New York Branch, is a branch licensed by the New York State Department of Financial Services. Deposits and other investment products are not FDIC insured, they are not guaranteed by any bank and they may lose value. Please note that telephone calls may be recorded in line with market practice.