The new word in town is 'Recovery' - but say it with caution

ANALYSIS:THERE IS a new R-word in town: recovery. Sadly, the town in question is more of the global village than anywhere that might have a fada on its welcome sign, while the talk of recovery is still preceded by qualifiers such as cautious, tentative and fledgling, writes LAURA SLATTERY

Ben Bernanke, chairman of the US Federal Reserve, provided the impetus to yesterday’s stock and oil markets when he signalled that the global economy was “beginning to emerge” from recession. At a central bankers’ annual jamboree in Jackson Hole, Wyoming, Bernanke added that strains persisted in financial markets, while households continued to experience “considerable difficult” in accessing credit.

Give credit to Bernanke: there was something for everyone, optimists, pessimists and realists alike, in his remarks. It is year three of the credit squeeze and no one wants to look like an idiot.

But the global economy has to swish past the U-bend back into the light at some stage and yesterday’s slew of economic indicators were all pointing in the right direction.

They included a surprise expansion in the French manufacturing sector in August and a bounce-back to growth in the German services sector, as elucidated in their respective purchasing managers indices (PMIs).

Unlike Japan, which this week declared a somewhat improbable growth in its second-quarter GDP due to higher exports, the French and German economies are showing real evidence of domestic demand. It doesn’t sound like much to get excited about, but the influence of these two powerhouses of the euro zone economy on Ireland could prove to be substantial in many ways.

First up is the potential for a booming European economy to boost Irish exports. The Government is pinning its hopes on an export-led recovery in the Irish economy largely because, to put it crudely, domestic consumers are likely to remain hammered by an array of taxes and job cuts in the months ahead.

Next week Ireland’s other main trading partners, the UK and the US, will issue revised second- quarter GDP figures.

Sadly, the ups and downs of the real world tend to lag the world of economic indicators.

Ireland’s own second-quarter GDP figure is likely to show a more flattering figure than the heartbreaking 8.5 per cent year- on-year decline recorded in the first quarter. Unemployment though is not expected to peak until mid-2010, right about the time the more buoyant euro zone economy could bring more pain in higher interest rates.

Yesterday, economists forecast that the European Central Bank (ECB) would begin hiking rates next June, with Holger Schmieding, the chief European economist at Bank of America, predicting the key lending rate would rise from 1 per cent to 2.5 per cent by the end of next year.

ECB president Jean-Claude Trichet will address the Wyoming central banker symposium today and economists will be on standby to decode his careful words.

Pessimism about the economy can be a self-fulfilling prophecy: last year accusations flew that we were talking ourselves into recession. It remains to be seen if we can talk ourselves out of one.