Qualified optimism is healthiest forecast

Recent weeks have witnessed a generalised burst of optimism regarding the prospects for economic growth worldwide. Private sector revisions to economic growth have been matched by upward revisions to growth forecasts from international agencies such as the International Monetary Fund (IMF).

The remarkable feature of all of these forecasts is that the prospects for virtually all the major economic blocs seems to be improving at the same time. The only area which exhibits a significant degree of risk on the downside, is Continental Europe.

Turning first to Britain, recent data point to the likelihood that the economy will achieve a soft landing. A very weak fourth quarter in 1998 has been followed by a small pick-up in growth during the first three months of 1999. By the second half of this year the cumulative impact of falling interest rates over the past year is expected to generate a steady improvement in economic activity. For 2000, British economic growth is now forecast at 2.4 per cent.

This is good news for the Irish economy and it is also good news for the small and medium-sized companies on the stock market as they rely heavily on the British market for sales and profits.

The US economy continues to power ahead and has defied all predictions of a slowdown. Forecasters find themselves revising their estimates of economic growth for the US upwards yet again this year.

Some slowdown is now expected by next year but a healthy growth rate of 2.5 per cent is predicted. However, any slowdown in the US will probably be softened by strengthening growth in the Far East and Latin America.

While the once mighty Japanese economy is still struggling to lift itself off the floor, government measures to stimulate activity do seem to have arrested the contraction in output.

The picture in the rest of the Far East is in fact becoming much better. Countries such as South Korea and Thailand are busy restructuring their economies and could well be achieving rapid rates of economic growth next year. The picture from Latin America is even brighter and the much-feared Brazilian meltdown never really occurred.

Overall, the economic outlook for the US, Latin America, the Far East (excluding Japan) and Britain is looking increasingly secure for next year.

There are still question-marks concerning the Japanese recovery as many analysts express fears that without continuing injections of public spending, economic recovery will falter later this year. Likewise, Continental Europe has disappointed this year and there are fears that the crisis in Kosovo could escalate and dampen European economic growth.

For equity investors the ideal environment is one where some, but not all economic blocs are growing strongly at any one time. If world growth became too strong it would only be a matter of time before inflation began to rise. Rising interest rates and bond yields would then lead to falls in equity prices.

For the moment equity markets seem to reflect a view that stronger economic growth will lead to higher profits but will not be sufficiently strong to push up inflation.