Global sell-off carries a blunt message

Ireland needs a benign international environment to sustain strong economic growth

The sell-off in shares on global financial markets since the new year has been triggered by increased uncertainty about the outlook for the world economy. A key concern has been the poor state of China’s economy as well as evidence of weakness in the US economy and new fears about the financial health of banks in the US and Europe.

These issues, when allied to a low oil price, a strong dollar and sustained weakness in developing economies, have prompted investors who are worried about global growth to sell equities and other riskier assets. Recent days have seen a particularly volatile trend which appears to reflect real concern among investors. This has the scope to damage international confidence if it continues for much longer – already business leaders are scratching their heads and trying to work out the implications.

The stock market is driven partly by sentiment and, at times of great share price volatility, the primal investor emotions – greed and fear – often predominate. The recent bout of market nervousness has produced some panic selling. And European stocks have declined to their lowest levels in more than three years.

One continuing worry for investors is whether central banks have any further scope, via monetary policy, to stimulate global growth. Quantitative easing – money printing by central banks – has met with some success, depressing interest rates to historic lows. But America's central bank, the Federal Reserve, which began raising rates in December with the intention of further rises in 2016 may yet have to reverse course.

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In Japan, its 10-year government bond now yields a zero rate of return for buyers – a measure of extreme investor nervousness, where bond holders are willing to lend money for no return and for a long time period.

Ireland, as an open trading economy, has been greatly helped in its recovery by some uniquely favourable external developments. A weak euro, low interest rates and falling oil prices have all boosted domestic consumption and helped expand exports to the US and UK.

Ireland depends on a benign international environment to sustain the rapid economic growth rate achieved. This is a reality that the political parties have so far failed to address in the general election debates on economic policy, which have seen a day-by-day unveiling of new promises from the major parties.

The market volatility may ease. Ireland’s growth forecasts may be fine and the much-discussed fiscal space may appear. But there are important messages coming from the markets which should not be ignored. We simply cannot count on the continuation of the extraordinarily favourable world economic backdrop which has supported us over the last couple of years.