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

• Currency instability

• Too much aggression from paranoid ECB

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

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

Equity Markets

2005 2006 So Far

S & P 500 3.1% 3.8%

FTSE 100 16.8% 6.3%

German DAX 26.7% 9.1%

NIKKEI 40.7% 1.3%

ISEQ 18.9% 7.8%

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

Forecasts

73,00079,00080,974Housing Completions

4.4%4.3%4.4%Unemployment

2.6%2.7%2.5%Inflation

4.5%4.8%3.0%Exports

6.0%7.0%8.0%Investment

6.5%7.0%5.8%Consumption

4.4%4.9%4.8%GNP

4.7%5.2%4.5%GDP

2007f2006f2005e

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 !

Employment ChangesSECTOR Q4 2003 to Q4 2005

Agriculture -8,100

Other Production -9,100

Construction +52,600

Hotels & Restaurants +100

Financial & Business Services +31,700

Wholesale & Retail Trade +28,500

Education +9,800

Health +15,700

TOTAL +151,700

Price Changes (Jan’00-Jan ’06)+24.1%Overall CPI

+13.3% Food

+53.7%Health

+59.4%Childcare

+69.2%Health Insurance

-21.4%Clothing & Footwear

+52.7%Electricity

+239.3%Water Supply & Refuse Charges

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

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

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

LTV New Houses

LTV Second Hand Houses

PermanentTsb House Prices

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

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’

House Prices & Consumer Confidence

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!

ANY QUESTIONS