Presentation given by the CBI’s chief economic adviser, Ian McCafferty to more than 160 guests at a CBI lunch sponsored by the Bank of Ireland

1. Economic Outlook
Challenges for business
Ian McCafferty
Chief Economic Adviser
CBI

2. A divergent and uncertain global recovery
World Trade Volume
• 2011 Growth pause % 3m/3m Growth (lhs) Level (rhs) 2000=100
• Commodity prices, supply chain 6% 180
disruptions, China slowdown 170
1%
160
• The outlook for 2012-13 -4% 150
• 1-2-6 world
140
• Critically dependent on avoiding big risks -9%
130
-14% 120
2008
2009
2010
2011
Advanced economy growth rates HWWI Commodity Price Indices ($)
% yr/yr All Commodities Excl. Energy
% q/q (real)
US Eurozone Japan
2.0 80%
1.5
60%
1.0
0.5 40%
0.0
20%
-0.5
-1.0 0%
-1.5
-20%
-2.0
Q1-10 Q2 Q3 Q4 Q1-11 Q2 Q3 Q4 Q1-12
Q1 2012 outturn data only available for the
US

3. Risks: oil and commodity prices
$ per barrel
Oil prices
130
125
● Pressure on oil prices: supply concerns arising 120
from political instability in MENA, embargo on 115
110
Iran, disruptions in South Sudan; risk premium 105
around $20pb 100
95
● Market fundamentals tight: some scope for 90
85
Saudi supply replacement 80
● Medium-term trend in prices is firm: strong
EME demand, alongside constrained supply
2007=100
Non-oil commodity prices
● Record sterling and euro prices: close to 250
Food Metals Non-food argiculturals
historical tipping point for economic activity?
200
150
100
50
0
2
2
2
2
2
2

4. Risks: How will the Euro crisis play out?
Periphery Maturing Debt
• The ECB has bought time €bn
60 Greece Portugal Ireland Spain Italy
• ECB LTRO: “lender of last Source: Goldman Sachs
50
resort”, reduced some market
risks 40
• But governments must deliver a 30
systemic solution to the 20
underlying causes of the crisis 10
• New & rigorous fiscal architecture 0
• Bank recapitalisation Jan Feb Mar Apr May
• Joint debt responsibility EBA: Aggregate Capital Shortfalls
Greece*
• Supply side reform Spain
• Competitiveness imbalances Italy
Germany
• Short to medium-term growth France
package Portugal
Belgium
• 2012 a testing time Austria
Cyprus
• Sovereign debt rollovers; bank Slovakia
refinancing Netherla…
• Difficult political climate 0 5 10 15 20 25 30
Source: European Banking Authority * Greek recap needs based on EU/IMF requirements that exceed EBA standards €bn

5. Risks: policy error/political shifts
Elections and other political
tensions could easily lead to
policy error
• French elections (May)
• US elections (November)
• UK coalition tensions (growing)
• Middle East (volatile)
• Rogue states (unpredictable)

6. Global outlook 2012-13
2012-2013: Global growth prospects
looking up – but dependent on Eurozone World GDP Growth
outcomes 2011 2012 2013
World 3.8 3.3 4.1
• Modest recovery in advanced economies: Advanced
1.6 1.4 2.3
• US and Japan are sustaining momentum economies:
USA 1.7 2.4 2.7
• Euro area will be weak – prone to strong Euro Area 1.5 -0.4 0.9
downside risks Japan -0.7 1.8 2.5
• EMEs will underpin global growth Germany 3.1 0.6 1.7
• Outlook vulnerable to elevated oil prices and France 1.7 0.1 1.2
developments in the Euro area. Italy 0.5 -1.6 -0.1
Spain 0.7 -0.9 -0.2
pp Contributions to world GDP growth UK 0.7 0.6 2.0
6.0
Advanced economies Emerging economies
5.0
Emerging
4.0 6.4 5.6 6.4
economies:
3.0 China 9.2 8.6 8.8
2.0 India 7.1 6.1 7.1
1.0
Brazil 2.7 3.2 5.0
0.0
Russia 4.3 4.3 4.2
-1.0
Africa 3.5 3.2 4.5
-2.0
-3.0
2007 2008 2009 2010 2011 2012 2013

7. Eurozone overview 2012-13
2012-2013: Core and periphery diverging
Latest Euro area growth forecasts
• Modest “recession” underway, but sluggish growth 2011 2012 2013
should resume if the crisis remains contained
Euro area 1.5 -0.4 0.9
• Germany to lead the recovery, helped by
Germany 3.1 0.6 1.7
relatively robust domestic demand
• France, Scandinavia and Austria to regain France 1.7 0.1 1.2
momentum from H2 2012; deeper downturn Italy 0.5 -1.6 -0.1
in Netherlands Spain 0.7 -0.9 -0.2
• Austerity tightening in Italy and Spain, Greece -6.9 -6.7 -1.8
worsening the growth outlook; Greece and
Portugal in deep recessions
Eurozone Purchasing Managers Indices
• Headline inflation is falling as energy prices 50.0 = No Change
Overall Services Output Manufacturing
60
decline – ECB so far cautious about cutting
interest rates 55
• Unemployment set to rise throughout 2012 and 50
into 2013 – despite a continuing fall in Germany 45
• Impact from disorderly resolution to the euro crisis 40
would be huge 35
30
2008
2009
2010
2011

8. UK overview 2012-13
2012 set to be another difficult year; some
momentum building up through 2013 Latest UK Forecast
• H1 2012 “bumping along the bottom”; momentum 2011
2012 2013
(outturn)
picking up in H2. Pace of recovery into 2013
GDP 0.7 0.6 2.0
crucially dependent on corporate confidence
Household Consumption -1.2 0.2 1.6
• Fiscal headwinds/sluggish consumers will
constrain domestic demand; some recovery in Manufacturing output 2.0 -0.9 1.8
exports; corporate investment? Consumer Prices 4.5 3.0 2.2
• Inflation falling but sticky; unemployment will Unemployment (%) 8.1 8.6 8.8
continue to rise
CBI GDP forecast £bn, 2008 ILO unemployment
% q/q prices Millions
1.5 370
Growth (lhs) Level (rhs) 3.0 CBI forecast
1.0
365
0.5 2.6
360
0.0
2.2
-0.5 355
-1.0 1.8
350
-1.5
1.4
345
-2.0
1.0
2…
2…
2…
2…
2…
2…
2…
2…
2…
2…
-2.5 340
2008 2009 2010 2011 2012 2013

9. UK: fiscal and monetary policy
% GDP Public sector net borrowing
• Austerity package under pressure 12.0
Structural Cyclical
• Deficit elimination two years later 10.0
• Debt peaks at 78% 8.0
6.0
• Impact on economy 4.0
• Annual drag on GDP of ~0.5% points 2.0
• Credibility premium delivers looser 0.0
monetary policy
• Monetary policy to remain accommodative
• Low rates into 2013 Growth in planned public spending
Real % rise
• More QE? 7 Chart excludes the impact of the
6 transfer of Royal Mail pension
fund assets in 2012/13
• Fiscal policy: sticking to Plan A 5
4
• 2012 Budget 3
• Need for Growth Agenda 2
1
0
-1
-2
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
2013-14
2014-15
2015-16
2016-17

10. UK: a constrained economy
The ‘nice’ decade: world GDP growth & inflation
End of the “Nice Decade” % yoy
6.0 3.0
• Legacy impacts from the financial
5.0 2.5
crisis
4.0 2.0
• Bank recapitalisation
3.0 1.5
• Consumer deleveraging
• Fiscal austerity 2.0 1.0
1.0 0.5
• Growth constrained for some time 0.0 0.0
1995 1997 1999 2001 2003 2005 2007
Shocks and Recessions
Big 5 financial crises
Financial crises
External demand shock
Oil shocks
Monetary policy tightens
Output loss % from peak
Duration (quarters)
Fiscal policy contraction
0 1 2 3 4 5 6 7 8
Source: IMF

11. UK: rebalancing in a changing world
• UK must shift to a different model of growth Rebalancing GDP growth
3.0%
• Investment and net trade Growth 2.3% p.a.
2.5%
• Broader sectoral contributions Growth 2.1% p.a.
• Financed by savings not debt 2.0%
0.4%
C
1.7%
1.5% C
0.9%
• Against backdrop of global change I
1.0%
• Emerging market growth 0.4%
• Rapid digitalisation 0.5% I 1.0%
X-M
0.5%
• Shifting demographics 0.0% G -0.2%
• Growing resource constraints -0.3%
X-M G
-0.5%
1997 - 2009 2011 - 2015
Disposable income in China rising 15 Ageing of UK population
14
2020 £6tr
13
12
Compound annual
11
growth: 13% Number of people
2008 £1.4tr 10 aged 65+
9
8
0 2 4 6 8

12. Economic Outlook
Challenges for business