Uncertainty clouds outlook for the global economy

The historic low interest rate environment is an opportunity for Ireland yet to be fully exploited

The prospects for a sustained and strong recovery in the world economy are increasingly in doubt. The outlook for global growth remains clouded as economic risk is compounded by political uncertainty. Last week the president of the European Central Bank (ECB) said the pace of the recovery in the euro area may be slowing; although the bank has revised upwards its growth forecast for 2016 from 1.4 to 1.6 per cent. Nevertheless, Mario Draghi considers the risk to growth is "tilted to the downside".

Likewise, the OECD has warned that the global economy could stall this year. Excessively loose monetary policy employed to help boost growth, which began in the US and UK in 2009 and was followed later by the ECB, has resulted in historic low interest rates and huge purchases of sovereign debt by central banks. These measures, the OECD says, have been in place too long and may now be counter-productive.

At the recent Group of 7 (G7) meeting in Japan the leaders of the world's largest economies heard the country's prime minister Shinzo Abe try – but fail – to convince them of the risk of an imminent global economic crisis – similar in scale to the collapse of Lehman Brothers in 2008 that precipitated the financial crash.

In the US, the board of the Federal Reserve, the country's central bank, meets next week to decide whether to tighten monetary policy by raising short term interest rates for just the second time in 10 years. However, last week's disappointing monthly employment report – where far fewer jobs were added to the US economy than forecast – makes a rate rise less likely. In addition, several members of the bank's board have expressed their concern about the Fed raising rates ahead of the Brexit vote in the UK on June 23rd.

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Political uncertainty about the referendum outcome has weighed heavily on financial markets and not just in the UK. Brexit is also seen as a risk to global growth through a contagion effect. And, as the OECD has warned, the potential exit of Britain from the EU “would significantly affect” the Irish economy.

Exchequer returns to May have been far better than expected, with tax receipts significantly higher than forecast, reflecting strong employment growth and increased consumer spending. The economy can also expect to benefit from the ECB’s decision to extend its current programme of quantitative easing – the purchase of sovereign bonds – to include the buying of corporate bonds.

By depressing the yields on corporate debt, the ECB purchases will enable larger companies to take on more debt at lower interest rates or to refinance existing debt at lower rates. The historic low interest rate environment is – given Ireland’s high levels of public and private debt and increasing weakness in the world economy – an opportunity that has yet to be properly exploited.