1

Global & Irish Economic Outlook

17 February 2011

John Beggs

Chief Economist

AIB Global Treasury

2

Challenges

Restore order to public finances

Boost jobs and skills

Support existing and find new sources of economic

growth

Stabilise the banking system

Restore public trust and confidence

Risks and uncertainties in world economy

3

Economic recovery underway in 2011

Irish GDP (Yr-on-Yr % Change)

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 (f) 2011 (f) 2012 (f) 2013 (f)

Source: Thomson Datastream, AIB ERU

4

Wide range of views on Irish GDP prospects

% change in real

terms

2010 2011 2012 2013 2014 2015

National

Recovery Plan

0.3 1.7 3.2 3.0 2.8 NA

European

Commission

-0.2 0.9 1.9 2.5 3.0 3.0

IMF -0.2 0.9 1.9 2.4 3.0 3.4

AIB -0.5 1.0 3.0 3.5 4.0 4.5

5

Wide variation on outlook for domestic demand

% change in

real terms

2010 2011 2012 2013 2014 2015

National

Recovery Plan

-3.8 -0.8 1.1 1.5 1.6 NA

European

Commission

-4.3 -3.4 -0.7 0.4 1.4 1.5

IMF -4.1 -2.2 0.5 1.2 1.9 2.9

AIB -5.1 -3.3 0.8 2.1 2.3 3.3

6

Ireland exporting its way out of recession

Irish Exports of Services (Volume Yr-on-Yr % Change)

-8

-4

0

4

8

12

16

Q1-04 Q3-04 Q1-05 Q3-05 Q1-06 Q3-06 Q1-07 Q3-07 Q1-08 Q3-08 Q1-09 Q3-09 Q1-10 Q3-10

Source : CSO

Irish Industrial Production Volume: 3 Mth Moving Average Y/Y %

-10

-5

0

5

10

15

Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10

Source: Thomson Datastream

7

Drag from domestic demand will abate over time

GDP Contributions (2008-2012)

-15

-12

-9

-6

-3

0

3

6

2008 2009 2010(f) 2011(f) 2012(f)

Personal Spending Govt Spending Stocks & Fixed Investment Net Exports

%

Source: CSO and AIB ERU forecasts

8

Advanced economies stuck in slow lane

% change volume 2009 2010 2011 2012

Global -0.6 5.0 4.4 4.5

Advanced Economies -3.4 3.0 2.5 2.5

US -2.6 2.8 3.0 2.7

UK -4.9 1.7 2.0 2.3

Eurozone -4.1 1.8 1.5 1.7

Emerging Economies 2.6 7.1 6.5 6.5

World Trade -10.7 12.0 7.1 6.8

Source: IMF World Economic Outlook, Update January 2011

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Euro in narrow range against key currencies

Euro / $

Exchange Rate

Sterling / Euro

Exchange Rate

E u r o / $ E x c h a n g e R a t e

F M A M J J A S O N D J F1 . 1 5

1 . 2 0

1 . 2 5

1 . 3 0

1 . 3 5

1 . 4 0

1 . 4 5

S o u r c e : T h o m s o n D a t a s t r e a m

S t e r l i n g / E u r o E x c h a n g e R a t e

F M A M J J A S O N D J F0 . 8 0

0 . 8 2

0 . 8 4

0 . 8 6

0 . 8 8

0 . 9 0

0 . 9 2

S o u r c e : T h o m s o n D a t a s t r e a m

10

Official interest rates set to rise

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

0

1

2

3

4

5

6

7

Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10

Fed Funds

Source: Thomson Datastream

ECB Repo Rate

BoE Bank Rate

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Domestic spending still contracting, albeit at slower pace

National House Price Inflation

-10

-8

-6

-4

-2

0

2

4

6

Q1-03 Q1-04 Q1-05 Q1-06 Q1-07 Q1-08 Q1-09 Q1-10

-20

-15

-10

-5

0

5

10

15

20

Quarter-on-Quarter : LHS Year-onYear : RHS

% %

source: permanent tsb/ESRI

Housing Completions

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

1970 1975 1980 1985 1990 1995 2000 2005 2010 (f)

Source: CSO; DoEHLG and AIB ERU forecasts

Housing Repayment Affordability *

10

14

18

22

26

Q1 96 Q1 97 Q1 98 Q1 99 Q1 00 Q1 01 Q1 02 Q1 03 Q1 04 Q1 05 Q1 06 Q1 07 Q1 08 Q1 09 Q1 10

* % of disposable income required for mortgage repayments for 2

income household, 30 year 92% mortgage.

Based on permanent tsb/ESRI national house price

Sources: AIB, permanent tsb/ESRI, CSO, Dept of Finance,

AIB ERU Calulculations

%

Irish Personal Savings Rate (%)

0.0

2.5

5.0

7.5

10.0

12.5

2001 2002 2003 2004 2005 2006 2007 2008 2009 (e) 2010 (f) 2011 (f) 2012 (f)

Source: CSO, AIB ERU

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Irish retail sales flat

Irish Retail Sales (Volume, Yr-on-Yr % Change)

-25

-20

-15

-10

-5

0

5

10

Q1 2006 Q3 2006 Q1 2007 Q3 2007 Q1 2008 Q3 2008 Q1 2009 Q3 2009 Q1 2010 Q3 2010

Source: Thomson Datastream

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Consumer confidence remains weak

Consumer Confidence (ESRI - KBC)

20

40

60

80

100

120

Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

Source: ESRI - IIB, Thomson Datastream

Confidence Indicator

Expectations Component

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Irish inflation makes reappearance

Irish Inflation (Annual CPI and HICP Measures)

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

Mar-07 Aug-07 Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10 Dec-10

CPI HICP

Source:Thomson Datastream

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Productivity growth to pick up

Irish Whole Economy Productivity Growth (4 year moving average %)

0.0

1.0

2.0

3.0

4.0

5.0

1974 1978 1982 1986 1990 1994 1998 2002 2006 2010

Source: CSO, AIB ERU Calculations

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Positive employment trends from 2012

2008 2009 2010 2011 2012 2013

Unemployment Rate % (average) 6.3 11.8 13.3 13.2 12.8 12.0

Labour Force Growth % 0.8 -2.4 -2.5 -1.6 0.0 0.5

Employment Growth % -1.1 -8.2 -4.1 -1.5 0.5 1.5

Net Immigration : Year to April (‘000) 39.0 -7.8 -34.5 -50.0 -35.0 -20.0

Source: CSO and AIB ERU forecasts

Easing in the pace of job losses in 2010 as

downturn in construction well advanced

Rise in unemployment levels out as

redundancies ease and emigration rises –

Live Register fell in three of the last four

months of 2010

Unemployment rate expected to average

around 13.25% in 2010 and 2011 before

falling to 12% by 2013

Unemployment Rate (%)

3

5

7

9

11

13

15

Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10

Source: Thomson Datastream

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Banking recapitalisation costs add to fiscal deficits

% of GDP 2008 2009 2010(f) 2011(f) 2012(f) 2013(f)

2014(f)

General Gov Deficit 7.3 14.4 31.9* 9.4 7.3 5.8 2.8

Gross General Gov Debt 44.3 65.5 94.2 98.6 102.0 102.5 100.0

Actual National Debt** 28.0 47.0 60.0 70.0 76.5 79.5 78.5

*To comply with Eurostat rules, the Gen Gov deficit and debt figures in 2010 include the cost of capital injections

into banks via promissory notes (some 20% of GDP) even though these funds are to be put in over the next 15

years and not in 2010. Thus, the underlying Gen Gov deficit in 2010 is 11.6% of GDP.

** The actual National Debt provides for bank promissory notes, not in 2010, but as funded each year by

Exchequer (€3.1bn from 2011 onwards) and also nets off cash balances (€16 billion). It stood at €93.5 billion at

end 2010 (60% of GDP).

Source: Dept of Finance, NTMA and AIB ERU

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% change in real terms unless

stated

2008 2009 2010 (f) 2011(f) 2012(f) 2013 (f)

GDP -3.5 -7.6 -0.5 1.0 3.0 3.5

GNP -3.5 -10.7 -2.8 -0.5 2.0 2.5

Personal Consumption -1.5 -7.0 -1.0 -1.0 1.0 2.0

Government Spending 2.2 -4.4 -5.0 -5.0 -2.0 -2.0

Fixed Investment -14.3 -31.0 -26.8 -11.0 3.0 7.0

Contribution of stocks to GDP

growth (%)

-0.8 -1.4 1.5 0.0 0.1 0.1

Domestic Demand -5.1 -13.9 -5.1 -3.3 0.8 2.1

Exports -0.8 -4.1 8.7 6.5 5.5 5.5

Imports -2.9 -9.7 5.4 3.0 4.0 4.5

HICP (%) 3.1 -1.7 -1.6 1.4 1.5 1.5

Personal Savings ratio (%) 5.2 11.0 12.0 11.0 9.7 8.0

Construction Investment

as % GDP

16.0 11.4 7.7 5.9 5.7 5.9

Current Account as % GNP -6.6 -3.7 -1.3 0.6 0.3 0.0

AIB Irish Economic Forecasts (2010-2013)

Source: CSO, AIB ERU Forecasts

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Summing up

Narrow based recovery underway

Global economy supportive

Some improvement in Irish cost and price competitiveness

Exports of goods and services could surprise on upside

Construction sector well below trend but limited scope for recovery

Consumer sector hampered by uncertainty over jobs, fiscal policy

Employment to recover by 2012 but unemployment to remain high

Credible fiscal path and sort out banks essential if pressure to lift

on sovereign

Economic news flow should improve – help to rebuild confidence

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Factors for strong medium term growth remain intact

Ireland strongly positioned in international recovery

Very open economy will continue to benefit from globalisation and FDI

Large, modern, diversified, export base that will benefit from global recovery

Ireland remains committed to its low corporate tax regime

Competitiveness expected to improve further, building on the considerable progress already

made from large price and wage falls

Internal structural factors remain positive for cyclical recovery

Young, flexible population

Housing output will need to rise from extremely low 2011 levels

Public infrastructure still at active stage of development

Scope for rebound in depressed consumer spending and business investment

High personal savings rate (estimated at 12% in 2010)

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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 only 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 publication is not to be reproduced in

whole or in part without prior permission. Allied Irish Banks p.l.c. is regulated by the Central Bank of Ireland.

Economic Research Unit

www.aibeconomicresearch.com