After an extraordinary few days of upheaval, the financial markets appear to have regained some poise. At least for now. A big sell-off was driven in part by events in Japan, where the knock-on impact of an interest rate increase was part of the problem. Underlying the sell-off were also concerns about the health of the US economy and the risks of recession.
These fears have eased in recent days and yesterday the latest figures from the US jobs market were more positive. That said, the outlook is unclear. The higher interest rates which the Federal Reserve Board have put in place to bring down inflation are inevitably having an impact on the economy. By their nature, the impact of higher borrowing costs is gradual and uncertain – but the risk of a sharper fall in growth or a recession remain. More turbulence may lie ahead.
The market upheavals also reflect ongoing uncertainty about the world economy post-Covid and after the cost-of living crisis which followed the pandemic. Old certainties about the globalised nature of economic activity are being questioned amid geo-political upheaval and related questions about the future of international supply chains. Financial markets have got it wrong before – leading to periods of extreme volatility – but the risks now look higher. The bet, up to recently, had been of a " soft landing” for the US economy. Now investors are not so sure, though this still remains quite likely.
For Ireland, as an open economy, these international trends are important. A big downward fall in financial markets can have a real impact on world growth, though this has been avoided for now at least. However, the underlying health of the US economy is of critical interest from an Irish viewpoint, particularly given the presence of many major US firms here.
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The mixed performance of the US technology sector in recent results and concerns about the wider US economy thus need to be watched closely. The markets are important – and can give important signals – but it is the real economy that matters.