Transcript Source: Bloomberg Forecasts

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Economic and Financial Update
O’Leary Insurance Group
Jim Power, Chief Economist, Friends First
20th May 2009
The International Background
• Global economy coping with unprecedented shock to
financial system
• Most of world in serious difficulty– some green shoots
appearing in US – but from very low base
• Global financial system still under serious strain
• Considerable personal wealth destroyed
• Corporate balance sheets badly damaged
• Investor sentiment very fragile, although somewhat better
• Massive official policy response to date - more to come
• Will take some time to work due to structural problems
Global Economic Outlook
(Real GDP)
2008
2009f
2010f
Global Economy
3.2%
-1.3%
1.9%
Euro Area
0.9%
-4.2%
-0.4%
US
1.1%
-2.8%
0.0%
UK
0.7%
-4.1%
-0.4%
Germany
1.3%
-5.6%
-1.0%
France
0.7%
-3.0%
0.4%
Japan
-0.6%
-6.2%
0.5%
f=forecast
Source: Bloomberg Forecasts
The Irish Economic Background
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Economy in deep recession
Every sector badly affected
Public finances deteriorating rapidly
Labour market deteriorating rapidly
Banking system still in a very uncertain place, despite
re-capitalisation & nationalisation – plan now in place,
but will it work?
Lack of understanding of realities of EMU membership –
competitiveness undermined
Confidence generally very poor across economy
Social Partnership model inappropriate
Image of Ireland has been badly damaged
Causes of Current Irish Crisis
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External situation – but more
Economic policy inappropriate
Failure to control spending
Too much dependence on construction
Loss of competitiveness
Irresponsible bank lending
Irresponsible personal behaviour
Failure of regulation
Bubble economy allowed develop – they always
burst!
An Economy in Recession
Credit Growth (YoY)
Consumer Confidence
Ireland - Unemployment
Irish Economy in 2009
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Will be a very difficult year
Unemployment will rise a lot further
Public finances will remain under pressure
Consumer dynamics to remain difficult
Housing correction has further to run
Competitiveness has to be the focus
Considerable risks on downside at the moment
Conditions for Recovery
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International economic cycle needs to improve
Stabilisation of housing market
Solution to banking crisis
Exchange rate improvement
Fiscal certainty
Competitiveness
Path to recovery will be very difficult!
Competitiveness
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Cost base of economy needs to fall
Focus on outputs rather than inputs in public spending
Lower cost of housing
Lower fuel & energy costs
Lower local authority charges
Minimum wage level
Focus on quality of labour force
IT capability
Broader tax base, low marginal rates
Proper regulatory framework
Functioning banking system
External image of Ireland
Interest Rates
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ECB 4.25% to 1% - could go lower from here.
Federal Reserve now at 0 to 0.25%
Bank of England at 0.5%
Extraordinary times requiring extraordinary responses
New measures being introduced
Rate cycle will rise once economic cycle recovers
Equity Markets
• Markets sentiment looking better
• First green shoots of positive news
• Global economic background still
very uncertain - but more hopeful
• Very strong official response should
eventually work
• Markets await concrete signs of economic
stabilisation
• Equity markets typically turn 6/9 months
ahead of economic cycle
Equity Markets
2008
Jan 1st -May 15th 2009
FTSE 100
-31.6%
-1.9%
Dow Jones
-33.8%
-5.5%
German DAX
-40.4%
-1.5%
French CAC
-42.7%
-1.5%
NIKKEI 225
-42.1%
+4.6%
ISEQ
-66.4%
+12.5%
Effects of Financial Crisis
• Very difficult investment background - nothing 100%
safe
• Historically low interest rates
• Global economic recession
• Global banking system in serious difficulty
• Traditional credit lines under serious pressure
• Property markets everywhere under serious pressure
• Lots of negative equity in mortgage market
• Investor sentiment towards domestic banks very poor
• Equity background looking better
Thank you!
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