Be Inspired!

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) f2010f Global Economy3.2%-1.3%1.9% Euro Area0.9%-4.2%-0.4% US1.1%-2.8%0.0% UK0.7%-4.1%-0.4% Germany1.3%-5.6%-1.0% France0.7%-3.0%0.4% Japan-0.6%-6.2%0.5% f=forecast Source: Bloomberg Forecasts

The Irish Economic Background 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 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 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 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 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 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 %-1.9% Dow Jones-33.8%-5.5% German DAX-40.4%-1.5% French CAC-42.7%-1.5% NIKKEI %+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!

Be Inspired!