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Expert views on global economic threats
[February 22, 2006]

Expert views on global economic threats


(Sunday Business Post Via Thomson Dialog NewsEdge)George Soros: The financier has joined the pessimists of the world economy by warning that the Federal Reserve could trigger a collapse in house prices. AUS recession could loom next year if the Fed were to raise interest rates too quickly, said Soros. A US recession could overspill into a foreign exchange crisis and global instability as the value of the dollar drops. Commentators have pointed to the surging price of gold as evidence that investors are increasingly worried that the Soros scenario will become reality. Investors have, in effect, hedged their bets by buying gold as an insurance policy against their assets held in dollars.



Gold, which last month hit a 25-year high, has in the past reflected investor uncertainty on the global economy.

The OECD It all depends which report you read from the Organisation for Economic Cooperation and Development (OECD), the Paris think tank.


A report published last month and co-authored by a former head of its Irish desk examined whether global house prices could be justified by the fundamental strength of national economies, including Irelands.

A number of elements in the current situation are unprecedented, the OECD said. The size and duration of the current real house prices increases, the degree to which they have tended to move together across countries and the extent to which they have disconnected from the business cycle. The evidence examined here suggests that overvaluation may only apply to a relatively small number of countries. It went on to warn: If house prices were to adjust downward, possibly in response to an increase in interest rates or for other reasons, the historical record suggests that the drops in real terms might be large and that the process could be protracted. This would have implications for activity and monetary policy. The OECDs review of recent economic studies suggested that new houses in Ireland had been 20 per cent overvalued since the end of 2004.

Other reports from the OECD focusing on the Irish economy have downplayed the risk of a house price crash here.

Pat McArdle, Ulster Bank The Ulster Bank chief economist does not foresee an Irish property collapse because he predicts that the European Central Bank will only raise rates by a further half point to 2.75 per cent. His forecasts for interest rates are among the most benign, as he believes that the German economy will fail to grow significantly. Other economists see rates rising further because they are bullish on the prospects of the German economy. But McArdle predicts a 60 per cent probability that the dollar will fall significantly over the next couple of years.

If the dollar goes down, the eurozone will suffer even more as demand for German heavy manufacturing goes down. We would be back at 1 per cent growth in the eurozone and Irish exports would not increase as fast as forecast, said McArdle.

John Fitzgerald, ESRI While the economy has the potential to continue growing quite rapidly, there are significant dangers on the horizon, the Economic and Social Research Institute has warned recently.

If there are no unpleasant surprises the economy could grow at just under 5 per cent a year out to 2010.

However, the US economy is currently on an unsustainable growth path with ever-rising deficits.

If and when the US economy switches to a more sustainable path this could result in a slowdown in growth elsewhere, including in Ireland.

While this is unlikely to happen within the next two years, thereafter there is the risk that Ireland could find itself experiencing a rate of growth below its long-term potential. The ESRI said that the economys dependence on the building and construction sector left the economy vulnerable to shocks.

Among the key priorities for policy is the need to manage the exposure of the economy to external shocks and also to its exposure to sudden changes affecting building and construction. Dan McLaughlin, Bank of Ireland The Bank of Ireland chief economist believes that it is not the US current account, but the threat of global inflation re-igniting that poses the risk to the Irish economy. Financial markets are anticipating a continuation of the benign inflation backdrop, said McLaughlin.

Consequently, the Irish government can borrow ten-year cash at 3.5 per cent. The reason people are prepared to lend them that money is that nobody thinks inflation will be an issue. To me, we are all too complacent because the global economy is growing at a ferocious pace, he said.

Long-term bond yields surging to 5 per cent would change everything for asset prices. McLaughlin ascribed a 25 per cent probability to the risk of a surge in bond yields.

Jim Power, Friends First The Friends First chief economist predicts a low enough, but still not insignificant risk of a collapse in the dollar.

[This] would create major instability for US corporations overseas, said Power. A domestic shock would be felt if we continue to lose competitiveness, as we have had over the past five years. We got the US shock in 2001, but the difference was that US companies were not affected overseas - and in 2001 we were a lot more competitive, said Power. After 2007, he predicts a significant slowdown in Irish house prices as supply catches up with demand.

Prices in the later part oft he decade will rise by at most 2 or 3 per cent a year, he predicted.

Brian Weber, Morgan Stanley Quilter Head oft he Dublin branch of wealth adviser Morgan Stanley Quilter, Weber predicts that Irish property prices will slow. The growth on property we have seen in the last couple of years is unsustainable, said Weber. But one thing that worries me is the level of belief in property as an asset class.

People need to look at diversification. Weber believes that equities look fair value and that they will continue to outperform property.

On the US current account deficit, Weber sees only short-term pain economically as the dollar falls.

Politicians have signalled that they will sort out the problem. PROPERTY PRICES Scan the worldwide property surveys and it becomes clear that Ireland is not the only country experiencing potentially destabilising rapid growth rates of property prices. Indeed, what central bankers around the world are trying to understand is whether the decade-old global investment shift into property can be justified.

Some commentators in recent years, led by the Economist magazine, have created a mini-industry in predicting an Irish property crash.

House price inflation can spur world central bankers to raise interest rates. Significantly, the European Central Bank (ECB) has been underscoring increasingly hawkish policy comments by pointing to home price increases across Europe. It may surprise many that Irish residential house price inflation was not the highest in the world last year.

According to Research Worldwide.com, house prices rose 15 per cent in South Africa, followed closely by Denmark, France, New Zealand, Spain, the US, Belgium and Norway, which all posted double-digit price rises.

Ireland shared tenth place with Finland in the 2005 house price inflation league.

Increased interest rates have already taken their toll on many countries.

In Britain, house price inflation slowed last year to only 3 per cent from almost 13 per cent in 2004, and the rate of Australian price growth dropped to 1 per cent from 8 per cent a year earlier.

Researchers predict world house prices will slow this year across 23 countries to only 6.7 per cent in 2005, down from almost 9.5 per cent in 2004.

Germany and France The ECB was sending out mixed messages earlier this month after it said in its monthly bulletin that there were signs that the housing market in some eurozone countries was overvalued by between 15-20 per cent.

It said price increases in some unspecified countries might be unsustainable after prices had risen strongly in Spain, France, Italy and Ireland in recent years.

Prices in Germany have fallen recently.

The bank pointed to lower interest rates, rising incomes and increased availability of loans as the factors which might have driven housing demand.

But the bank said that the current period of high house price inflation could merely be a correction from 1994-1998, when house prices across Europe fell behind the increase in incomes.

Britain Recent British figures showed mixed signals on whether prices were starting to accelerate again. After the Bank of England had raised interest rates over the past two years, house price inflation fell sharply. Significantly, a property crash predicted by some commentators had been avoided. Recent surveys from British banks have tracked an increase in prices.

But the latest figures from the British Land Registry found that prices fell in the last three months of 2005 had brought the annual rate of British house price inflation down to only 4.6 per cent. Nonetheless, the figures showed that house purchase transactions had climbed 13 per cent in the final quarter of 2005 from a year earlier.

United States The direction of US house prices has sparked considerable interest for economic commentators who have warned that global property prices are heading for a crash.

Prices across major US cities rose an average 40 per cent in two years, according to the Case-Shiller home price index for September 2005, despite the Federal Reserve having increased short-term interest rates during the period.

US prices defied the Fed rate rises because the mortgage market is tied to long-term interest rates, which have fallen in the past year.

Cheaper borrowing costs and rising incomes in the booming US economy have consequently led to a surge in property prices. Prices rose the fastest in Miami, with a surge of3 0 per cent in the latest 12 months, and in Washington and Los Angeles by over 21 per cent.

New York City prices, which were up by over 13 per cent in the year, continued to rise by 2.7 per cent in the three months to September. The Case-Shiller index showed that Boston prices had barely risen in the September quarter and rose by only 6.2 per cent in the year.

Australia The Australian central bank, the Reserve Bank of Australia, said earlier this month that house prices had fallen for a second consecutive year in Sydney and that price differences with other Australian cities had consequently narrowed. Prices in Sydney rose by 0.1 per cent in the last three months of 2005 - the first increase since the same quarter two years earlier.

Price inflation varied greatly across other Australian cities last year. In Melbourne and Canberra, pr ices rose by around 2 per cent but surged by 21 per cent in Darwin and by 19 per cent in Perth.

The price falls that have occurred in Sydney, together with the stable or increasing prices in other capitals, have brought price relativities between Sydney and the other capitals back to the pre-boom levels of the early to mid-1990s, the bank said.

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