US economy had tough year but recovery is now under way


Ground Floor: At the time I used to trudge in to the IFSC to earn my crust, I would use the quiet period at the end of the year to get rid of the pile of unread economic forecasts and commentaries that had built up on my desk during the previous 12 months, writes Sheila O'Flanagan.

Of course the sensible thing to do would have been to read them as I received them and therefore have the weight of all that knowledge nestling safely in my brain; but usually I'd get as far as looking at the headline before the phone would ring or someone from settlements would appear with an apparently simple query that would take ages to sort out, so I'd push the research to one side and promise to read it later.

Later would turn out to be far too late but it was always a bit of fun to look through the previous January's forecasts in December and see how right they actually were.

At the end of last year, people were universally gloomy having gone through another 12 months of fairly unrelenting bearishness which saw all the major indexes fall for the third consecutive year. The worries for 2003 were the US deficits and the potential for war with Iraq. And on that basis the general call was for the dollar to go lower.

The forecasters got it right, the direction of the dollar was unremittingly downwards in 2003.

Forecasters also felt that investors would be concerned by the ever-increasing US budget deficit. Maybe they are, but so far the Far East, in particular, has been happy to fund the US recovery even as currency losses eat into their investments.

Which is why the US has shown a certain economic strength in 2003 and why commentators are feeling cautiously positive for that strength to continue in 2004. Back in January, the euro/dollar exchange rate was $1.0460. By December 2003 it was trading at over $1.22.

Because the weaker dollar has helped exporters as well as the profit line of US corporations who were repatriating money back to the States, the administration has been happy to see it fall. Improved corporate profits has meant that investors have been even happier to put money into the markets which is partly why the Dow managed to get back above the 10,000 mark in December.

The downside to the US recovery is still partly sustainability ­ although consumer sentiment has remained relatively positive, it's been positive with a very benign fiscal policy behind it.

Analysts worry that people will stop spending when rates move higher because the concern about this recovery has been its "jobless" nature.

Employment has not picked up despite the growth in GDP and the Fed has warned that growth in line with current expectations would still see high levels of joblessness right into 2005.

So the recovery is still very finely balanced and it continues to rely heavily on overseas investment to fund its deficits in order that US consumers can continue to engage in what they do best ­ spending money they haven't got.

If there was a sudden turn around in circumstances and the administration had to raise funding at home, the entire economy could end up a number of creeks without any paddles.

The focus continued on corporate scandals in 2003 too as we saw more white-collar perp-walks and heard further news of CEOs who liked to use public companies as private playthings. By September, the SEC had come out with 78 recommendations for improvements in governance ­ not surprisingly big business was aghast. Red tape, they suggested, would impinge on the ability of their companies to compete in a global marketplace.

George W tried a bit of red tape of his own when he decided to impose steel tariffs which were declared illegal by the WTO which will now slap penalties on the US as a result. George doesn't care though. The United States is still the world's major economy and he's in charge. Plus, he's landed a jet fighter on a carrier in the Gulf and captured Saddam Hussein. What more could a man want? Despite all the protestations about our "friendly" stance towards the States in the war which Bertie Ahern apparently opposed (and obviously most of us missed that), Ireland was not on the list of countries being invited to tender for contracts to rebuild Iraq.

I'm sure we could have done very well there since US companies (including Halliburton) appear to have massively overcharged the government so far and that's something that we're damn good at!

I printed my Spanish/Irish shopping basket a few times last year, taking to heart Mary Harney's exhortations to shop around.

Sadly, of course, I can't get to the Carrefour that often but the net change from October 2002 to July 2003 was impressive. In October 2002 my basket of goods cost 23.52 in Spain.

The Irish equivalent was 35.35. In July 2003, the cost of the same goods in Spain had gone down marginally, to €23.01 (pistachio nuts and salmon being the main reasons).

In Ireland, the basket had gone up to 38.78 - salmon might have declined in price in Spain but it had managed to increase by a whopping 34 per cent here.

Ireland is a difficult country to be fond of at this time of the year. It's cold, it's dark, it's expensive and, right now, it's so difficult to get around given that half of Dublin has been dug up for one reason or another.

But we're over the hump ­ the evenings are getting brighter, the Luas will eventually start operating, the Port Tunnel will be finished and the streets will be paved again. But not in 2004.