As we move beyond the half-way stage of 2001, the debate regarding the global economic outlook for the second half of the year has intensified. It is now economic history that the US economy slowed dramatically during the first half of 2001 and that weaker economic conditions have now spilt over into the European economy. Until recently, the consensus view was that an economic recovery would begin, led by the US, during the fourth quarter of this year, driven by the combination of aggressive US interest rate cuts and a George Bush tax give-away.
Unfortunately, the most recent economic and corporate news is placing a serious question mark over this cosy consensus of a second-half economic rebound. The most worrying source of uncertainty emanates from the continued weakness of the corporate sector. Technology companies in particular have continued to post very poor financial results. Of even greater concern is that many large corporates now do not foresee an upturn in activity and profitability until late next year at the earliest. Although the bulk of corporate pain has been confined to the technology, media and telecoms sector of the economy, there is an increasing risk that pressures will also emerge in other sectors of the economy. If economic growth stabilises around current levels with only a modest recovery towards yearend, then the damage to broad corporate profits should be relatively modest. The OECD's economic forecasts reflect this more benign scenario and currently envisage quite a significant acceleration in growth in 2002 (see table).
However, recent comments from US Federal Reserve chairman Alan Greenspan suggest that the Fed still takes the view that the risks of further weakness in the US economy are still quite high. If this turns out to be the case it stands ready to reduce interest rates further in order to avoid an outright US recession. In Europe, worries abound regarding the economic prospects of the larger economies in particular. Even in the British economy, where growth has been strong, there are increasing fears that the high sterling exchange rate could eventually create an economic crisis.
For the Irish economy most forecasters still expect real economic growth of 5 per cent to 7 per cent for this year and next. However, a recent quickening in the pace of job losses, primarily in the technology sector, seems to have generated a perceptible shift in sentiment regarding the risks facing the Irish economy. If global economic conditions deteriorate during the second half of the year, the Irish economy will not be immune. The only question is how severe the damage will be to the economy.
In this regard the signs are somewhat ominous, given that the bulk of corporate weakness remains concentrated in the technology sector. So far, job cuts in Ireland and globally across the sector have been relatively modest, as companies seem to have taken the view that there will be an upturn in demand later this year. Recent statements from company chairmen suggest that weakness in the sector could continue well into 2002. As job cuts in the global IT area go deeper during the second half of the year, the pace of job cuts in the Irish multinational sector could well rise dramatically. Recent news from Intel and Gateway seems to confirm that job losses in the sector will be much greater than during the first half of the year. Only time will tell whether weakness in the high-tech sector will act to depress economic activity throughout the economy.
