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  1. 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

  2. The Risks • Oil Prices • US twin deficits • Currency instability • Too much aggression from paranoid ECB

  3. 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

  4. 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

  5. Equity Markets

  6. 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

  7. 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

  8. 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 !

  9. Employment Changes

  10. 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%

  11. 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

  12. 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

  13. 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

  14. LTV New Houses

  15. LTV Second Hand Houses

  16. PermanentTsb House Prices

  17. 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

  18. 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’

  19. House Prices & Consumer Confidence

  20. 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!

  21. ANY QUESTIONS