THE WORLD economy has been in free-fall for many months but now shows some tentative signs of stabilising. It may be premature to claim that recovery is either imminent or certain. But there are encouraging signs abroad and, for the first time, some qualified optimism may be justified.
The chairman of the Federal Reserve – America’s central bank – has said again that the US recession is likely to end this year. In testimony to Congress earlier this week, Ben Bernanke cited a recovery in consumer spending and improvement in the housing market as his grounds for optimism. US banks are more willing to lend to each other while consumers, encouraged by record low interest rates, are more willing to spend. Mr Bernanke now expects economic activity to turn up later this year if progress in repairing the financial system continues.
He may be the first to detect some “green shoots” of recovery, the harbinger of better times for the US economy. In Europe, the immediate outlook is less encouraging. This week the European Commission published its spring economic survey, with economic activity in the euro-zone area forecast to contract by 4 per cent in 2009 or by less than half the rate of decline forecast for the Irish economy.
Certainly, recession has hit the euro-zone harder than the US; in part because it is more open, more dependent on exports for growth and therefore more vulnerable to the slump in global demand that has followed the credit crunch. However, to offset the impact of the global economic downturn, the Federal Reserve has cut interest rates more aggressively than the European Central Bank (ECB). It has also engaged in quantitative easing, which involves the creation of money to buy assets; a form of economic stimulus that the ECB has been reluctant to contemplate so far.
The ECB may announce a further quarter point cut in its main interest rate today which would bring it down to a historic low of 1 per cent. This would further reduce the cost of borrowing and provide a stimulus to economic activity. For the Irish economy a rate cut would provide a welcome boost in a week in which some encouragement can be taken also from Exchequer returns for April. Although the data showed tax revenues down by nearly one-quarter on the same period in 2008, the figures suggest economic activity is no longer in sharp decline.
Ireland remains one of the world’s most open economies and is greatly reliant on strong global growth for economic recovery. For once, this week, the good news for the domestic economy has outweighed the bad: first, some early signs of a US led recovery; second, President Obama’s proposals on corporate tax avoidance proved less damaging than feared – important because US multinationals in Ireland contribute 40 per cent of corporate tax receipts; third, the exchequer returns for April offered some consolation – albeit bleak – and fourth, a likely ECB interest rate cut is in prospect later today. And the glass, too often half empty, looks half full.