Ireland cannot afford a US recession

A cooling US economy is potentially more good than bad for Ireland - but only if America does not slip into recession.

The bulk of foreign multinational investment in Ireland originates in the US. Intel, Microsoft and Compaq all have large operations here.

However, few analysts believe that the scale of the recent earnings downgrades issued by some of America's biggest companies will have a significant impact on European expansion plans.

Most of the products manufactured by US firms here are re-exported to other parts of the EU and European growth is expected to exceed that of the US in 2001. However, there is no reason to be complacent.

The large scale redundancies announced by Motorola earlier this month demonstrate this State's potential vulnerability. Equally, Intel's postponement of expansion plans is not necessarily all good news.

According to Mr Colin Hunt, head of research at Goodbody Stockbrokers, the US economy is likely to have a soft landing and, as a result, there is likely to be ongoing employment creation here.

The Industrial Development Authority (IDA) is also beginning to focus more on health and e-commerce companies. Cardinal Health's arrival in Longford is a case in point and the IDA is hoping to build on broadband infrastructure with more service providers next year.

The health sector is more stable than technology, according to the IDA, while the e-commerce sector is only starting to develop.

Dr Dan McLaughlin, chief economist at ABN-Amro, points to the dual mandate of the US Federal Reserve. Unlike the ECB it also takes growth and employment into account when setting interest rates. As a result, it is likely to cut rates by at least half a percentage point next year. That could even lead to a rebound in the US economy in the second half of 2001, he says.

However, Mr Jim Power, investment director at Friends First, warns that a continuing decline in earnings for US companies could have serious repercussions here. "The danger is if we did get a hard landing and negative growth in the US we could start to see many US firms looking more seriously at oversees investments.

"Ireland would be doubly exposed because of the very high levels of multinational investment."

The other side effect of a slowing US economy is a weaker dollar which, in turn, means a stronger euro. That will be good news for Irish inflation. Most of our inflation is determined outside the State and the level of the currency is a key determinant both for the consumer price index and commodity prices.

However, a rapid resurgence in the euro would do more harm than good, hitting exports hard. What Ireland needs is a gentle landing in the US combined with a modest appreciation in the euro. Too much of either could spell trouble.