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April 2013

The Irish Economic Update – Doing Relatively Well September 2014. Oliver Mangan Chief Economist AIB. April 2013. aibeconomicresearch.com. Irish economy recovering after deep recession. Irish economy boomed from 1993 to 2007 with GDP up by over 250% – Celtic Tiger

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April 2013

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  1. The Irish Economic Update – Doing Relatively Well September 2014 Oliver Mangan Chief Economist AIB April 2013 aibeconomicresearch.com

  2. Irish economy recovering after deep recession • Irish economy boomed from 1993 to 2007 with GDP up by over 250% – Celtic Tiger • Very severe three year long recession in Ireland from 2008-2010. GDP fell by 10% • Collapse in construction activity and banking system, severe fiscal tightening, high unemployment • GDP in 2010 back to 2005 levels but still over 25% higher than in 2000, highlighting that the economic crash came after a very strong period of growth, unlike in other countries • Ireland entered a three year EU/IMF bail-out programme at end 2010 as it could no longer access funding on global capital markets • Ireland exited its financial assistance programme on schedule in December 2013, without a precautionary credit line - has very large cash balances and no problem with market access • Budget deficit has declined at quicker than expected pace in past four years • Ireland benefits from the pick up underway in world economy, given its large export base • Domestic economy recovering, led by rebound in investment and labour market • GNP rose by 1.9% in 2012 and 3.2% in 2013. GNP up by 3.4% yoy in Q1 2014

  3. Upbeat tone to Irish data continues in 2014 • GNP rose by 3.2% in 2013. GNP up by 3.4% yoy in Q1 2014 with GDP up by 4.1% yoy • Strong pick up in mfg PMI in past year – hits highest level since 1999 in August • Surge in manufacturing output in H1 2014 – up 24% yoy in Q2 • Exports rebound strongly in H1 2014. BoP remains in large surplus • Very strong services PMI data this year – index well over 60 in recent months, at 7 year highs • Housing market improving, while commercial property market recovering strongly • Construction PMI soars to above 60 – averages over 60 year-to-date, at record highs • OECD leading indicator for Ireland rises strongly – hits best level in H1 2014 since 2008 • Consumer confidence in July at its best level since early 2007 • Strong rise in core retail sales in recent quarters – up by 4% yoy in Q2 2014 • Car sales surge by 30% year-to-date – best sales since 2008 • Employment rises for 7 consecutive quarters, up 1.7% yoy in Q2 2014 • Declining Live Register, with jobless rate falling from 15% in H1 2012 to 11.2% by Aug 2014 • Further large fall in budget deficit in 2014: spending below target, taxes ahead of schedule

  4. Strong Irish economic indicators

  5. Labour market has improved– good job growth *Note: Employment ex Agriculture: +1.3% in 2013

  6. Exports pick up again as pharma patent cliff abates • Ireland a very open economy – exports, driven by huge FDI, equated to 105% of GDP in 2013 • Major gains in Irish competitiveness since 2009 • Goods exports fell by 4% in 2013 on sharp drop in pharma output (patents expire). Rebound in H1 2014 • Service exports rise strongly since 2010 as new FDI broadens export base and global recession ends • Total exports rise by 7.4% yoy in Q1 2014

  7. Impact of FDI on economy (Source IDA) KEY FDI IMPACTS ON THE IRISH ECONOMY • 1,050 multinational companies • €121bn Exports (70% of Irish exports)- 161,000 Jobs in FDI, 275,000 in total • - 70% of Corporation Tax • - €11bn Spending on services/materials • - €8bn in Payroll • - 67% of Business R&D expenditure WORLD LEADERS CHOOSE IRELAND - 8 of the top 10 in ICT - 9 of the top 10 in Pharmaceuticals - 17 of the top 25 in Medical Devices - 3 of the top 5 Games companies - 10 of the ‘top born on the Internet’ firms - More than 50% of the world’s leading Financial Services firms

  8. Domestic economy recovers over past year • Domestic economy contracted by 23% from its peak in Q1 2008 to mid-2012 • Construction investment big drag on GDP growth - fell from 13-14% of GDP in 2004-08 to 5% in 2012 • Total construction output rose by 13.7% in 2013 • House building stabilised last year and has started to pick up in 2014 from very low levels • Pick-up in commercial property market last year which has continued in 2014 • Business investment (ex volatile transport, mainly planes) rebounding – up 40% yoy in Q1 2014 • Total investment (ex transport) up 14.5% yoy in Q1 • Strong rise in retail spending over past year, up 3.4% yoy in H1 2014, with car sales up by 30% year-to-date • Fiscal drag has eased considerably in 2013-14 • Domestic spending (ex transport) rose by 0.4% in 2013 and up by 3.3% yoy in Q1 2014

  9. Dublin house prices surge amidst a lack of supply • Housing output fell by 90% but now past the bottom of cycle • Much 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 now rebounding – up 17.5% from low • Dublin prices up by 34% and non-Dublin prices rise by 7% from their troughs • Nationally, prices up 13.4% yoy in July 2014. Dublin up 23%, non-Dublin rise 5% yoy in July • House prices nationally are now 42.3% below peak level hit in 2007 (Dublin now 43% below peak) • Rents also rebound – up 20% from lows • Decline in number of second-hand properties for sale. Very low level of new house building • Shortage of family homes emerges in Dublin • Current level of house building nowhere near meeting estimated demand

  10. Housebuilding rising from very depressed levels • Housing completions 8,300 in 2013; 8,500 in 2012 • House building is beginning to pick up but activity is still at very low levels • Big jump in new housing registrations and commencements, but still at depressed levels • Latest data show housing completions also picking up (+32% in 2014), especially in Dublin • Recovery in house prices should help spur more building activity • Housing affordability, though, still at levels pertaining in 1997, before the boom started • Mortgage lending up almost 50% in H1 2014, though still at low level in absolute terms • Government announces measures to help boost house building activity • Completions may hit 11,000 this year but will take a couple of years to get near 25,000 demand level

  11. AIB Model of Potential Housing Demand 2010-2016 Sources: CSO, DoECLG, AIB ERU

  12. Budget deficit in marked decline, little funding required • Some €30bn of fiscal tightening implemented in 2008-2014 period. Little more to be done • Further marked fall in budget deficit in 2014. On course for sub 3% deficit by 2015 • Primary budget (i.e. excluding debt interest costs) back in surplus in 2014, with a primary budget surplus of over 2% of GDP by 2015 • Debt interest not overly high at 5% of GDP • Maturity profile of debt greatly extended. Modest amount of bonds mature in 2015-17 • Very high government cash balances of €25 billion at mid-year. Exchequer fully funded to end 2015 • Ireland exited its EU/IMF bailout programme on schedule in December 2013 • Irish bonds yields have fallen sharply with five year yields at 0.7%, ten year falls to 1.8% • Sovereign debt ratings upgraded; two rating agencies now have Ireland at A-

  13. Gov debt stabilises; private sector deleveraging

  14. Ireland benefits from improving global economy • The adjustment on the domestic side of economy is over so no longer a drag on growth • Housing, labour market and domestic demand are all on an improving path • Construction rebounding from very depressed activity levels • Little further fiscal tightening required in 2015 to get budget deficit down below 3% of GDP • Major gains made on the competitiveness front • Large, diversified export base means Ireland benefits from improving global growth • Irish lead indicators pointing to more strong growth • GDP growth of 3% forecast for 2014 as pharma cliff eases. GNP to rise by 3% also • GDP growth of 3.5% in 2015 and 3.7% in 2016 as domestic demand improves further • Scope for upside surprises on growth, especially if exports and/or investment perform very strongly

  15. AIB Irish Economic Forecasts Source: CSO, AIB ERU Forecasts

  16. Risks to the Irish economic recovery • Recovery in the global economy is not yet secure, especially in the eurozone, with on-going risks and headwinds. This is a concern given importance of exports to the Irish economy • Major changes to corporation tax, although this would have to be agreed to by Ireland • Supply bottlenecks in the construction sector, especially new house building • High indebtedness and scale of balance sheet repair by households (mortgage debt is very high, as are mortgage arrears). Major deleveraging has already taken place but difficult to estimate its duration • Continuing credit contraction – fewer banks, tighter credit conditions, on-going deleveraging CPD Hours. The code for this presentation is 2014-0604 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 4 Queens Square, Belfast BT1 3DJ. Registered Number NI 18800. 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.

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