| Click for the Finfacts Ireland Portal Homepage |

Finfacts Business News Centre

   
Home 
 
 News
 Irish
 Irish Economy
 EU Economy
 US Economy
 UK Economy
 Global Economy
 International
 Property
 Innovation
 
 Analysis/Comment
 
 Asia Economy

RSS FEED


How to use our RSS feed

 
Web Finfacts

See Search Box lower down this column for searches of Finfacts news pages. Where there may be the odd special character missing from an older page, it's a problem that developed when Interactive Tools upgraded to a new content management system.

Welcome

Finfacts is Ireland's leading business information site and you are in its business news section.

We provide access to live business television and business related videos from: Bloomberg TV; The Wall Street Journal; CNBC and the Financial Times. Click image:

Links

Finfacts Homepage

Irish Share Prices

Euribor Daily Rates

Irish Economy

Global Income Per Capita

Global Cost of Living

Irish Tax 2008

Climate Change Reports

Global News

Bloomberg News

CNN Money

Cnet Tech News

Newspapers

Irish Independent

Irish Times

Irish Examiner

New York Times

Financial Times

Technology News

 

Feedback

 

Content Management by interactivetools.com.

News : Irish Last Updated: Apr 24, 2009 - 5:31:05 PM


AIB Bank says Irish economy will recover in 2009/2010; House prices need to fall to 2005 level
By Finfacts Team
Feb 7, 2008 - 5:13:24 AM

Email this article
 Printer friendly page

AIB says that even if its forecasts prove overly optimistic, the downturn in activity is unlikely to derail the economy completely. The economy will still hold onto virtually all the gains in output, employment and living standards achieved since 1993. These are very impressive gains, with real GDP increasing by 167% and employment rising by over 75% in this period. As the chart shows, there has been very strong growth in GDP per capita in Ireland relative to the UK and eurozone over the past decade.

Finfacts reports show that the issue of Irish GDP has a number of caveats: OECD releases new GDP and household consumption comparisons based on purchasing power parities; Irish GDP per capita flattered by huge multinational presence

World Bank study says 12 economies account for more than two-thirds of world’s output; Chinese economy size cut by 40%; Ireland is fourth most expensive world economy


AIB Bank says in its latest Irish Economic Update that much slower rates of Irish growth in output and employment are in prospect in 2008 reflecting, in particular, a sharp contraction in housing activity and a weaker global economy.

The fundamentals of the economy remain sound, though, so growth should pick up in 2009/2010 as the downturn in housing bottoms out and global growth improves.

The bank says that the economy is entering a period of much weaker growth, but from a strong base. The public finances are in very good order, the economy is close to full employment with a very flexible labour market and all sectors of the economy have enjoyed strong growth in recent times. It has been particularly encouraging to see a marked pick up in manufacturing output and a rebound in goods exports over the past year. Even more encouraging is the continuing buoyancy of the services sector, including the continued strong rise of service exports, which are likely to comprise 45% of total exports this year - overwhelmingly from the foreign-owned sector, which accounts for over 90% of Irish exports. The volume of service exports has grown by more than 10% in each of the last five years.

The Irish economy, though, is set to experience a marked deceleration in the pace of economic activity in 2008. Real GDP is forecast to grow by 2.5%. This represents a sharp slowdown from the estimated GDP growth rate of 5.5% last year, and 5.7% and 5.9% recorded in 2006 and 2005, respectively.

The main factor behind the slowdown in GDP growth in 2008 is a slump in new housing output, with housing completions forecast to fall to around 50,000 this year from 78,000 in 2007.

Taken together with a fall in housing transfer costs, such a decline will knock close to 4% off GDP in 2008. The external environment is also much more challenging, with a slowdown in key export markets and the currency appreciating strongly, so export growth will slow.

AIB says although there has been much talk that the economy had become overly dependent on housing in recent years, the reality is different. Excluding housing, GDP growth exceeded 5% in each of the last three years, averaging 6.3%. Even with new housing declining by 12% last year, the economy still grew by an estimated 5.5%. Given this performance, we see no reason not to expect a resumption of strong growth once the sharp downward adjustment in housing activity is complete and the global economy returns to a firmer footing.


Thus, GDP growth should pick up again in 2009 and 2010 as the downturn in new housing activity starts to level off and no longer acts as a major drag on GDP growth and the global economy recovers. We see GDP rising by 3.7% in 2009 and 4.4% in 2010. Even if our forecasts prove overly optimistic, the downturn in activity is unlikely to derail the economy completely. The economy will still hold onto virtually all the substantial gains in output, employment and living standards achieved since 1993. Furthermore, the medium term growth prospects for the economy remain very favourable, judging by demographic trends.

Irish Housing

The sharp housing market downturn witnessed last year was precipitated by a rapid deterioration in affordability in 2006, which quickly resulted in a significant drop in demand and in an oversupplied market. The deterioration in affordability reflected the fact that prices had risen too far too fast in 2006 (in an increasingly overstocked market) while interest rates were also on an uptrend since end 2005.

  • In terms of supply, completions have been in decline since mid-2007 and the trend in registrations and commencements suggests that the level of completions is on course to fall to somewhere around 50,000 units in 2008 (a fall of around 36% on 2007 levels of 78,000). At this stage, there remains considerable uncertainty about the outlook for 2009, and AIB says it is forecastinga level of 45,000. The bank says that the 2008 spring selling season will be crucial in this regard and it could well be April/May before we get any clear indication as to how strong this has been.

  • Overall, based on demographic and other factors, AIB sees the likely level of demand over the next five years as being between 50,000 and 60,000 units per annum.

  • The level of output is, thus, quickly adjusting downwards to somewhat below this medium-term demand level. This will help to remove the supply overhang that has built up in the current very difficult market conditions.

  • In terms of the overall supply/demand balance for housing as a whole, what is seen as important is the number of vacant “on the market” properties, be they new or existing properties. However, any measure of supply overhang is currently unquantifiable and, unfortunately, probably impossible even to guestimate, given the lack of data in this area. The Irish Auctioneers and Valuers' Institute said in January that there are 40,000 vacant apartments in Dublin. - - - See report including links to price reports: Davy says Irish housing starts still falling; bottom not yet in sight; Annualised rate over last three months below 40,000 units

  • The current supply overhang of new properties, along with considerable negative market sentiment, is forcing prices lower.

  • However, the further house prices fall, the greater the positive impact on affordability and the greater the support for the housing market in the future. AIB says that following the recent price falls, and with official interest rates on hold since mid-2007, the deterioration in affordability has now halted and is beginning to improve.

  • In order to restore confidence to the market, affordability conditions need to improve further and an increasingly likely way for this to happen is through a lowering of mortgage interest rates. The bank says that although the ECB continues to talk in hawkish tones, trends in the world economy mean that it is quite possible that the ECB will be forced to ease policy later in the year. There could thus be a cut in eurozone official interest rates of 0.25% around mid-year followed by at least one more similar move later in the year.

  • Affordability conditions will also improve as disposable incomes are boosted by modest pay rises and budgetary measures.

  • The bank also anticipates some boost to affordability from further modest house price falls. Overall, its analysis indicates that a fall in prices of around 15% from their peak (at the start of 2007) could well improve affordability conditions sufficiently to restore some momentum to the Irish housing market.

  • A cumulative 15% fall would bring house prices back to their level in the autumn of 2005.

  • Effectively, such a fall in prices would represent an unwinding of the last surge in house prices which took place from the autumn of 2005 to late 2006, and which was a major contributor to the overheating that developed in the housing market.

  • In terms of actual selling prices, as of February 2008 much of this adjustment has either already happened or will do so over the next few months.

  • However, given the lagging nature of the permanent tsb/ESRI index, this index will record declines for some months after the downturn in selling prices has ended.

AIB says that there is some anecdotal evidence that market sentiment is stabilising with some renewal of buyer interest, though this has yet to translate into any strong upturn in sales. However, it says it awaits the results of the spring selling season, which may not be apparent until April/May given the early timing of Easter, to see whether there has been any significant improvement in market sentiment.

In the meantime, AIB remains cautious of the Irish housing market, though believing that the next few months could well see selling prices close to their bottom (even if the permanent tsb/ESRI index does continue to decline). However, even if prices do bottom in the coming months, it is not anticipating any strong rebound; rather the bank anticipates that prices will remain relatively static or at best rise modestly.

Output levels, though are likely to continue to fall quite sharply this year and to a lesser extent into 2009, unless there is a marked turnaround in market sentiment, prompting developers to recommence their building programme.

Related Articles


© Copyright 2007 by Finfacts.com

Top of Page

Irish
Latest Headlines
UK firm opens van dealership in Dublin
Ryanair reports 8% fall in full-year profit; US services to commence in 2019
Global Financial Centres Index: New York overtakes London; Dublin slips to 66 of 83 cities
Bank of Ireland reports “significant” improvement in 2013 results
Sale process of IBRC UK projects Rock and Salt completed
CRH says 2014 will be year of profit growth after reporting 2013 loss
Ryanair reports third-quarter loss
Irish Water says it saved €100m in setup costs
RSA Insurance fires two Irish executives for large loss/ accounting irregularities
Bank of Ireland will have to raise provisions by €1.4bn; AIB says it's "well capitalised"
CRH reports slightly improved third quarter
Central Bank says ownership of Newbridge Credit Union transferred to permanent tsb
Ryanair reports H1 profits rose by 1% to €602m
Dublin Web Summit: Irish Stock Exchange and NASDAQ OMX announce dual listing plan
Irish pension managed funds returned to growth during September
Dan O’Brien resigns as economics editor of The Irish Times
Central Bank says no action required on Anglo tapes revelations
Ryanair flew 9m passengers and Aer Lingus carried 1.1m in August
UK Competition Commission says Ryanair must cut Aer Lingus stake to 5%
CRH reports H1 2013 revenue dip and loss
Vodafone refunded UK after discovery of Irish tax haven deal
RBS reports half year profit; Ulster Bank posts reduced loss
Bank of Ireland cuts pretax losses in HI 2013 to €504m
Irish State-owned Allied Irish Banks reports losses of €758m in H1 2013
Service Announcement
Irish managed pension funds declined in June
VHI reports 2012 surplus of €54.3m; Health insurance made loss
Ex- Elan director says management / board "not competent to run a business"
Aer Lingus to put €140m in employees pensions fund; Ryanair apoplectic
Wednesday Newspaper Review - Irish Business News and International Stories - - May 22, 2013
Tuesday Newspaper Review - Irish Business News and International Stories - - May 21, 2013
Ryanair, Europe’s biggest low cost carrier, announced Monday record annual profits of €569m - - up 13%
Monday Newspaper Review - Irish Business News and International Stories - - May 20, 2013
Friday Newspaper Review - - Irish Business News - - May 17, 2013
Thursday Newspaper Review - Irish Business News and International Stories - - May 16, 2013
Wednesday Newspaper Review - Irish Business News and International Stories - - May 15, 2013
Tuesday Newspaper Review - Irish Business News and International Stories - - May 14, 2013
Monday Newspaper Review - Irish Business News and International Stories - - May 13, 2013
Friday Newspaper Review - - Irish Business News - - May 10, 2013
Irish pension managed funds' returns rose again in April