Presentation made by Ian McCafferty, CBI chief economic adviser at CBI Northern Ireland's May 2009 economic lunch

1. Economic Challenges for
Business
May 2009
Ian McCafferty
Chief Economic Adviser
CBI

2. Global recession
Early 2009: falling off a cliff World Trade
% y/y
• Collapse on world trade; major destocking 30
20
• First synchronised downturn for 30 years 10
0
• OECD-led, but EMEs not exempt -10
Value
• 2009:slowest global growth since early -20
Volume
-30
1980s 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source : IMF
% y/y
Industrial Production
20 World GDP growth – by major region
15
10
2008 2009
5 World 3.3 -1.4
0 Advanced economies 0.7 -4.2
-5 Developing economies:
-10 Advanced economies Africa 5.8 2.9
-15 World
Latin America 5.0 -0.6
Emerging markets
-20 China 8.9 5.7
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
India 7.4 3.2
Source : IMF

3. Credit crunch: market conditions
• Lehman collapse: a seminal shock % Market interest rates: UK
• Interbank lending rates easing a little, but 7.00
6.00
still elevated. Wholesale markets starting 3m LIBOR rate
5.00
to re-open 4.00
• Impact of credit support packages? 3.00
3m LIBOR spread over 3m gilt repos
2.00
• Banks: capital adequacy, leverage & 1.00
capacity 0.00
01-2008
02-2008
03-2008
04-2008
05-2008
06-2008
07-2008
08-2008
09-2008
10-2008
11-2008
12-2008
01-2009
02-2009
03-2009
04-2009
05-2009
Availability of new credit: past 3 months
% balance
20 January February March
Market interest rates: USA
0 %
6.00
-20 5.00
4.00 US 3m LIBOR rate
-40 US 3m LIBOR
3.00
spread over T Bill
-60 2.00
1.00
-80 0.00
01/2008
02/2008
03/2008
04/2008
05/2008
06/2008
07/2008
08/2008
09/2008
10/2008
11/2008
12/2008
01/2009
02/2009
03/2009
04/2009
05/2009
-100
SMEs Large Very Large Overall

4. Significant policy response
Interest rates
• Immense policy response
%
6
UK
• Liquidity and credit support 5
• Bank bailouts
4
3
• Interest rate reductions 2 Eurozone
• Move to quantitative easing 1
US
• Fiscal stimulus 0
2004 2005 2006 2007 2008
Total fiscal packages 2008-2010
% of 2008 GDP
6
$ Billion Federal Reserve Monetary Base 5
2000
4
1500
3
1000
2
500
1
0
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2006
2008
0
UK USA Japan Germany Canada Korea
Source: St Louis Federal Reserve Bank
Source: OECD

5. Global outlook
World GDP growth
2010: modest recovery % yoy
6
• Less synchronised recovery 5
Forecasts
4
• US: early signs of recovery to come 3
2
• EU12: sharp recession through 2009 1
0
• China and India more resilient than -1
-2
other emerging economies – less 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
dependence on trade
World GDP growth – by major region
• Inflation declining
2008 2009 2010
• Fiscal pressures World 3.3 -1.4 2.1
Advanced economies 0.7 -4.2 0.2
• Drag from financial conditions? Developing economies:
Africa 5.8 2.9 3.7
• Elevated degree of uncertainty Latin America 5.0 -0.6 3.0
China 8.9 5.7 9.1
India 7.4 3.2 6.5

6. UK: GDP growth
%q/q GDP
• Sharp falls in Q408 and H109 1.5
1
• Rolling pattern of demand through
0.5
2009
0
• Inventory reductions -0.5
• Investment cutbacks -1
-1.5
• Consumption squeeze -2
CBI forecast
• No growth for 8 quarters (6 negative -2.5
2005
2006
2007
2008
2009
2010
quarters)
• Depth of recession: comparisons
with 1980s

7. UK: inventory adjustment
% balance
+15
Volume of stocks
+10
+5
• Sharp loss of confidence: 0
-5
uncertainty and credit constraints -10
• Production cutbacks leading to
-15
-20
sharp change in inventory behaviour -25 CBI Industrial Trends Survey
• Interconnectedness of production
chains and “just in time” magnify the Raw materials Work in progress Finished goods
impact
% contribution to
1 GDP Inventories
0.5
0
-0.5
-1
-1.5
2005 2006 2007 2008

8. UK Investment: falling sharply
% q/q oya
Business Investment q/q ova Residential Investment
25%
20%
15%
10%
5%
0%
-5%
-10%
-15%
-20%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
% balance
%
Industrial Trends Survey
Internal finance
External finance Cost of finance
Buildings
Plant and machinery

9. UK: Consumer squeeze
Real disposable income % Unemployment rate
%q/q oya 10.0
5 CBI forecast
4 9.0
3
8.0
2
1 7.0
0
6.0
-1
-2 5.0
-3 CBI forecast
2005 2006 2007 2008 2009 2010 4.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
GfK Consumer confidence Average earnings
% balance
% 3m/3m oya
25 Household financial
situation – next year 5.0
15 Inc. bonuses
5 4.0
-5
3.0 Exc. bonuses
-15
-25 Headline index
2.0
-35
General economic
-45 situation - next year 1.0
-55 2004 2005 2006 2007 2008 2009 2010
2005 2006 2007 2008

10. UK: Inflation
% m/m oya
Consumer prices Producer prices
% m/m oya % m/m oya
5 CPI
4 12 Output 40
3 10 prices
2 (lhs) 30
8
1 6 20
0 4
-1 2 10
-2 RPI Input
-3 0
prices 0
-4 -2
(rhs)
-5 -4 -10
2004 2005 2006 2007 2008 2009 2010
2004 2005 2006 2007 2008 2009 2010
Jan 2007=100
Commodity prices Average earnings
% 3m/3m oya
250 Oil
5.0
4.5
Inc. bonuses
200
Metals (CRB 4.0
150 index) 3.5
3.0
100 2.5
Exc. bonuses
Food
2.0
50
1.5
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2007 2008 1.0
2004 2005 2006 2007 2008 2009

11. UK: Public spending trends & pressures
Public sector borrowing
% of GDP
CBI forecast
14
• Dramatic deterioration in fiscal position 12
10
• Further fiscal stimulus? 8
6
• Risk to sterling? 4
2
0
-2
-4
Real %
rise Growth in planned public spending Spending by department / type
% rise pa next two years
money terms
Past 4.3% real pa
Now & future real 1.9% pa

12. UK overview
%y/y
GDP
5
2008 2009 2010 4
GDP 0.7 -3.9 0.1 3
2
Household Consumption 1.4 -3.4 -0.4 1
0
Manufacturing output -2.6 -12.0 0.5 -1
-2
Consumer Prices 3.6 1.6 1.6 -3
-4
Unemployment (%) 5.8 8.5 10.2 -5 forecasts
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
2009: recession
%y/y
• Sharp decline through winter, but worst now past CBI forecasts: GDP components
6
• Credit constraint still a major issue 4
• Confidence fragile 2
0
• Business investment very weak -2
• Shift in consumer behaviour? -4
2008 2009 2010
• Sterling weakness will help -6
-8
• Fiscal sustainability? -10
Consumption Gov. spending Investment

13. Global risks and uncertainties
• Financial markets: are we past the worst?
• Equity markets upbeat
• Disorderly exchange rates
• Expansion of public debt and sovereign default risk
• How quickly will credit flows recover?
• Impact on corporate sector
• Political and policy instability
• New US Administration
• Developing world economic troubles – political/social unrest?
• Impact on supply chains/resource security?
• Globalisation/ protectionism

14. Inflation or deflation?
%
CPI Inflation
5
4
2010: low inflation to persist 3
2
• Underlying conditions deflationary UK
1 USA
• Spare capacity 0
EUROZONE
• Significant policy stimulus -1
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
• Exit strategies?
Jan 2003=100 Commodity prices
500
• Central Bank independence?
450
• Energy and commodity prices? 400
350 Metals (CRB Index)
300
Oil (Brent Crude)
Food (Economist index)
250
200
150
100
50
2003 2004 2005 2006 2007 2008

15. Economic Challenges for
Business

16. USA overview
US Economic Forecasts % yoy GDP
4
3 Forecasts
2008 2009 2010 2
GDP 1.1 -3.7 0.3 1
0
Household Consumption 0.2 -1.6 1.4 -1
-2
Consumer Prices 3.8 -0.5 1.8 -3
Unemployment (%) 5.8 9.2 10.1 -4
-5
Current Account ($ bn) -652 -435 -540 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
%
2009: early signs of recovery to come 4.50 10 year bond yield
4.00
• Destocking ending % 3.50 Fed funds
7 3.00
• Housing market slowly unwinding 2.50
rate
6
2.00
• Consumer confidence picking up 5
4
• New unemployment claims peaking
3
But... 2
• Pace of recovery? 1
0
• Long term cost of fiscal & monetary bail-out? 2001 2002 2003 2004 2005 2006 2007 2008

17. Eurozone overview
Eurozone Economic Forecasts % yoy GDP
4
2008 2009 2010 3
2
GDP 0.7 -3.7 -0.1 1 Forecasts
0
Household Consumption 0.5 -2.0 -0.1 -1
Consumer Prices 3.3 0.8 1.0 -2
-3
Unemployment (%) 7.5 9.4 10.5 -4
-5
Current Account (€ bn) -63.2 -50.4 -30.5
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
2009: sharp recession
• Abrupt decline through winter
% yoy GDP growth forecasts for key countries
4.0
• Destocking 2008 2009 2010
2.0
• Dramatic drop in business investment
• Euro strength hurting exports 0.0
• ECB less reactive than Fed and BoE -2.0
• Worst hit: Germany, Ireland, Italy -4.0
-6.0
Germany France Italy Spain Netherlands

18. Emerging economies overview
GDP forecasts for key developing economies Contributions to world real GDP growth
% 2007
2008 2009 2010 35 2008
30
China 9.0 6.5 7.5
25
India 7.3 4.5 5.6 20
Russia 5.6 -6.0 0.5 15
10
Brazil 5.1 -1.3 2.2
5
Source: IMF 0
-5 China India Russia Brazil USA Japan
2009/10: sharp downturn, growth rebalancing
• EMEs hit by decline in global industrial activity, collapse in world trade, falls in primary
product prices, and in some cases deteriorating financial conditions
• China and India less affected than other Asian economies, emerging Europe and Latin
America – trade is a smaller share of their economies
• Rebalancing towards domestic demand underway – surplus economies able to
provide serious policy stimulus