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External Background. US economy still has considerable momentum Japan continues to show most positive signs in over a decade China still growing strongly UK struggling, but outlook positive Euro Zone continues to improve Solid external background. The Risks. Oil Prices US twin deficits

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External background l.jpg
External Background

  • US economy still has considerable momentum

  • Japan continues to show most positive signs in over a decade

  • China still growing strongly

  • UK struggling, but outlook positive

  • Euro Zone continues to improve

  • Solid external background


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The Risks

  • Oil Prices

  • US twin deficits

  • Currency instability

  • Too much aggression from paranoid ECB


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Financial Conditions

  • ECB rate tightening to continue

  • 1% by end-2007

  • Another 0.5% from Fed, BOE could cut

  • Exchange rate markets very stable

  • Euro should make some gains against sterling & dollar


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Equity Markets

  • Strong momentum has carried over to 2006

  • Markets not concerned about risks

  • Focused on solid economic & earnings fundamentals

  • Euro Zone markets continue to be favoured

  • Japan has struggled, but has potential

  • US not promising too many dramatics

  • Irish market retains solid fundamental support

  • 2006 another good year for equity investors & pension funds



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The Irish Economy

  • Strong momentum has carried over to 2006

  • Consumer spending, Construction & Business Investment strong

  • Exports/Manufacturing finding life challenging

  • Strong public finances, another ‘budget bonanza’ in December

  • SSIAs will exert considerable influence over next year

  • Growth prospects 2006 & 2007 good


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Forecasts

2005e

2006f

2007f

GDP

4.5%

5.2%

4.7%

GNP

4.8%

4.9%

4.4%

Consumption

5.8%

7.0%

6.5%

Investment

8.0%

7.0%

6.0%

Exports

3.0%

4.8%

4.5%

Inflation

2.5%

2.7%

2.6%

Unemployment

4.4%

4.3%

4.4%

Housing Completions

80,974

79,000

73,000


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SSIAs – The Facts

  • 1.14 million holders

  • €14,000 per person on average

  • €16 bln to hit streets in 12-month period commencing May 2006

  • 10% GDP, 22% Consumer Spending

  • Have SSIAs succeeded in creating savings habit, or are we about to witness a monumental spending binge?

  • Too soon to tell !



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Price Changes (Jan’00-Jan ’06)

Overall CPI

+24.1%

Food

+13.3%

Health

+53.7%

Childcare

+59.4%

Health Insurance

+69.2%

Clothing & Footwear

-21.4%

Electricity

+52.7%

Water Supply & Refuse Charges

+239.3%


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The Big Economic Issues

  • Future labour supply

  • Infrastructure & Public Services

  • IT Capability

  • Quality of labour force

  • Globalisation

  • Unbalanced nature of economic development/Threats to rural economic sustainability

  • The Housing Market


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Housing Market

  • Very strong performance in 2005

  • Very strong start to 2006

  • Demand forces still very strong

  • Supply response very strong

  • Market has to be approaching equilibrium

  • Prospects of hard landing remote

  • Economy has heavy dependence on housing market


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Market in 2005

  • Prices up by 9.3%

  • Net new mortgage lending +€21.9 bln, +28.5%

  • 80,957 completions

  • Mortgage debt 61.5% GDP

  • Mortgage Debt 116% of disposable incomes

  • Rental growth picking up again

  • Demand driven by inward migration, strong household formation, improved affordability & investors





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The Market in 2006

  • Frenetic start to 2006

  • Demand forces to remain strong

  • Interest rates will have no more than a modest sobering effect

  • SSIAs will have an important influence

  • Completions of around 79,000

  • Prices set to rise by 7%

  • Residential housing will be an important driver of activity once again


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Significance of Housing Market

  • Construction activity & direct employment

  • Construction output valued at €30 bln, Housing 65%

  • Mortgage market has grown from €25 bln to €100 bln in 6 years

  • Major driver of financial sector employment

  • Important contributor to tax take directly & indirectly

  • VAT €2.6 bln, & Stamps €800 mln

  • Equity market effect

  • Housing stock valued at €530 bln, significant consumer ‘wealth effect’



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Is Economy too Dependent?

  • Yes & No

  • Residential housing having a major impact on economic activity

  • Significant setback to market would have very negative effect on overall economy

  • Activity is justified by the ‘fundamentals’

  • Risk of significant setback low, but not immaterial

  • Policy imperative to create other sustainable activities!



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