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Economic Outlook: Strong Momentum and Positive Signs, but Risks Remain

This article discusses the current state of the global economy, highlighting the strong momentum in the US, Japan, and China, while noting the struggles in the UK. It also examines the risks, such as oil prices, twin deficits, currency instability, and ECB aggression. The article further explores the financial conditions, equity markets, and the Irish economy, providing forecasts for GDP, consumption, investment, exports, inflation, unemployment, and housing. Additionally, it analyzes the potential impact of SSIAs, employment and price changes, and the big economic issues. The housing market is evaluated, with insights into market performance, demand forces, supply response, and prospects for a hard landing. Lastly, the significance of the housing market in relation to construction activity, employment, tax contributions, and consumer confidence is examined.

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Economic Outlook: Strong Momentum and Positive Signs, but Risks Remain

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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

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