The Changing Retail Environment An Economic Outlook FDII Annual Conference APRIL 27th 2006

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The Changing Retail Environment An Economic
OutlookFDII Annual Conference APRIL 27th
2006

• Jim Power
• Chief Economist
• Friends First

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To Be Discussed

• Key Themes for Irish Economy
• Irish Economic Background Outlook
• The Big Economic Issues
• Consumer Dynamics
• Context for the Food Drinks Industry
• Official Policy Implications

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Key Themes

• Solid external economic background
• Rising interest rates
• Exchange rates relatively stable, but modest euro
  appreciation likely
• Buoyant housing market
• Increased indebtedness
• SSIAs
• What are the risk factors?

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What to Watch

• Oil Prices
• Geo-Political turmoil
• US twin deficits currency instability
• Chinese Imbalances
• Housing bubbles
• Too much aggression from paranoid ECB

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Financial Conditions

• ECB rate tightening to continue
• 1 ¼ by end-2007
• Another 0.25 from Fed, BOE could cut
• Exchange rate markets very stable, but
• Euro should make some gains against sterling
  dollar

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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 the
  next year
• Growth prospects 2006 2007 good

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Forecasts
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Where is Ireland Today?

• Has come through a decade of strong growth
• Growth momentum still strong, but nature of
  economy is changing
• Rapid economic catch-up has highlighted
  deficiencies
• Competitiveness has been undermined
• Significant dependence on residential housing
  market
• Manufacturing Agriculture under pressure

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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

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House Prices Consumer Confidence
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The Housing Market in 2006

• Frenetic start to year
• 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 82,000
• Prices set to rise by 8
• Residential housing will be an important driver
  of activity once again

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Near-Term Consumer Dynamics

• Very expansionary fiscal background
• Strong labour market
• SSIAs
• Growing population
• Increased affluence
• Inflationary pressures picking up
• Interest rates rising

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Medium-Term Consumer Dynamics

• Medium-Term growth of 5 p/a
• Strong labour market, but quality of jobs more
  important than quantity
• Rising population
• Inward migration
• Young age profile higher spenders
• Increased consumer power
• Balance between taxation and public spending

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Changing Age Structure
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Contributors to Pop. Change
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Employment Changes
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Manufacturing Output
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Manufacturing Growth Divergence
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Manufacturing Output Prices (ex VAT)
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Retail Sales Volumes
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Price Changes (Jan00-Mar 06)
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Consumer Issues

• Rip-Off Ireland a major myth!
• Consumer getting a more powerful, informed
  demanding voice
• Health Issues
• Price v Quality
• The Groceries Order
• Planning Guidelines
• Consumer demandinhg lower prices different type
  of shopping experience
• International competition will continue to grow
  to exploit one of the most vibrant consumer
  markets in Europe

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The Future

• Growing population, strong inward migration
• Changing demographics
• Economic outlook positive, notwithstanding
  obvious challenges
• Increased affluence, but changing spending
  patterns
• Price awareness will continue to rise
• Health issues will become more important
• Globalisation competition issues for every
  sector of economy, particularly retail sector

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THANK YOU