At the Cross Roads of Growth

Constantin GurdgievMiddlebury Institute of International Studies,

Monterey TCD, Dublin

www.macroview.eu June 2016

Some choices to be made…Topic 1: The Online EconomyGrowth v Risks: Margins & Atomization

Topic 2: Old Media, New MediaThe Demand Cliff Content Bubble

Topic 3: Data, Analytics & AIDisrupting More Than Insights Social, Operating & Strategy

Risks

Topic 4: Export OpportunitiesOpen Market Closed Demand

Topic 5: Irish Economy Through 2020Crises Ghosts The Wings of Change

1. The Online Economy: Growth v Risks

Good News and Some Bad

Consumption is growing

…but it is regionalized

…and downside risks dominate

upside risks

Nature of Demand• Precautionary savings• Ageing populations• Lack of growth drivers• Sticky demand, low trust• Shrinking margins

Behavioral NudgingEfficiencies Gains

Short-term Challenges: 2017-2020

Nature of Business

• Gen-Jinx & Millennials• Gen-Z• Atomization• Platforms exhaustion

Behavioral Enablement Neo-LudditesEfficiency via Atomization

Longer-Term: beyond 2020

2. Old Media, New Media:Old Bubbles, New Baths

The Demand Cliff

Consumption and Efficiency are Still Rising

Fatigue is Rising too

Content Bubble?

Media-driven inbound leads are still x1.5 more productive in generating traffic than

outbound leads

Inbound leads are 1/2 cost of outbound leads, so margins should be improved

… but… content space is crowded: social media converging to blogging platforms

(14% leads generation efficiency to 7%)

Vanity metrics: reach ≠ engagement ≠ influence ≠ conversion

2T web users 5.3T online ads & 1.7T FB content items annually

Content space is crowded: social media converging to blogging platforms

(14% leads gen to 7%)

Vanity metrics are a problem: reach ≠ engagement ≠ influence ≠ conversion

2 trillion web users 5.3T online ads & 1.73T FB content items annually

Revolt of the Middle?

In 2010, 13 percent of Americans opted to forego TV services

In 2015, the number was 19 percent

65% of those ages 18 to 29 had cable or satellite service at home in 2015

Compared with 83 percent of those 50 or older

Of those who opted to “cut the cord” 84 percent had “advanced internet access”

The key is instrumenting choice and empowering supply

Unique offer at commoditized price

Answer (hope): AI + Robotics

3. Data, Analytics, AI: Superficial Intelligence?

Cost rising Systems stability fallingDegree of complexity in

data collection & connectivity

Reputational costs (data ownership shift)

Analytics must align with models & intuition

Analytics will fade into data-driven demand

Supply side will fade into robotics, AI-based design, behavioral modification &

SCMBut humans will remain…

Value-Added Margins Challenge

Eureka Moment

High value-added in commoditized space

High informational potential in design & development

Bridging the gap to market

The Analytics Value Curve

Social, Operating and Strategy Risks

“He was so terrible that he was no longer terrible, only dehumanized”

F. Scott Fitzgerald, Tender is the Night

In operations:Smartest systems……yield dumbest fails

In production:

ComplementsSubstitutes

In interactions:

AidingDisplacing

In strategy:Tails

Uncertainty

Will over-reliance on analytics and automation de-humanize the economy?

A Demand Plateau

Internet usage is showing signs of fatigue

Flat growth 9% y/y, but 7% ex-IndiaDe-accelerated steadily post-2008

(15% pa)

Geography is changingTop 3 internet-enabled markets:

China, India, USA

Smartphones growth is slowing

21% vs. 31% y/ySmartphone shipments slowing 10% v

28% y/y -- lowest since 2008

4. Export Opportunities: Open markets with closed demand?

Changing Patterns of the Norm

U.S., Old Europe, JapanSecular stagnation:

Demand sideSupply side

Factor analysisFX valuations, employment, GDP growth & retail sales no longer translate into global

trade growth

Demand geography changes in EMs

Trade v domestic supply

Finance and Trade Disruption

Policy uncertainty is elevated across the globe

Advanced economies lead… …but EMs follow closely

Risk correlations are now more positive

Investment & Monetary Policies remain challenging

Low policy rates not translating into operating, trade & capex credit easing for

smaller firmsCurrency wars continue to rage

But trade slowdown is a temporary phenomena

As production & design become increasingly individual / atomistic…

…through enablement via production & supply technologies, design enablement &

AI…

Global Trade will become borderless to facilitate transition to a new model of

demand & supply matching

Finance and Economic Disruption

Key factors

Financial sector: capital, margins, NPLs, regulatory charges)Still re-trenching geographically

Competitive devaluations and QE-induced volatilityIndirect capital controls (Financial Repression)

5. Irish Economy to 2020: Crises Ghosts & the Wings of Change

View From the Top

Recovery shifting toward domestic sectors

Investment (organic ex-FDI) Retail sales Jan-Apr 16 growth ex-motors

~ similar to 2015 in value & volumeValue of sales growing slower than volumeConstruction pick up is off extremely low

levels

Drivers for growthECB and the Euro

FDI and tax optimizationDomestic demand (ex-investment funds)

Reduced public sector drag

Recovery-related risksProperty prices and rents Lack of business capex

Labor markets compressionProductivity growth

Return to fiscal profligacy

Has Irish Economy Decoupled from the Global?..

Global growth slowdown World economy is expected to grow at

3.1-3.2 percent per annum in 2016-2017

Well below historical average and average for past episodes of recoveries

Irish growth trendIrish growth is de-accelerating: total

domestic demand is expected to growth 4.7-4.8 percent in 2016 or ½ the rate of

2015 growth Still, this is well above 2.9-3.3 percent

potential rate of growth

External drivers (inc. expected tax amnesty in the U.S.)

Internal drivers (bouncing from extreme losses)

Internal drivers to organic upside

Legacy of the Crises

Banking & finance 101Mortgages

13.2% of all accounts were in arrears, 18.6% by value

207,624 accounts (23.5%) at risk (in arrears or restructured with higher or

same level of debt)

31.1% of all mortgages by value (EUR39.7 billion) were in at risk

Banking & finance 102Lending

Total lending to Irish households down 2% in 2015

Personal credit down 4.2%House lending down 1.7%

Credit advanced to Irish Resident SMEs (ex-financial & property sectors) was

down 14.8% in 2015New lending for Irish SMEs was up just

EUR245 mln y/y in 2015

Lack of consumer credit pressures

demand and investment

Risk mispricing uncompetitive distortions in

business credit

Pensions and savings are under pressure due to

NIRP

Lack of business credit strategy

loss of future productivity

Wings of Change

Economics of Growth 101Irish Demand

Early risersGen-Jinx & Gen-Z with familial networks

High mobility lower risks & greater opportunities (indigenous & foreign)

Relatively robust family formation ratesLow debt of younger generations

Labor market skew toward services favors younger generation

Economics of Growth 102Investment

Competitive institutions & regulatory environment

Minus a skew in favor of MNCs

Highly open economy

High HK on-shoring potential

Enterprise culture is not prevalent, but coincident with exporting culture

Financial risk cushions are still

significant & supportive of

demand growth

Challenge = Opportunity:

lifting indigenous exports & value-add

Relatively healthy entrepreneurial

culture & high HK mobility

State-controlled sectors are yet to face productivity

challenge