It will be months - perhaps years - before the full economic impact from the terrorist attacks on the United States will be evident. However the events of September 11th have had one immediate impact - the introduction of considerable uncertainty, which is in itself damaging confidence. The international economy was already threatened with recession before the attacks. Now it appears that some kind of recession is inevitable. What is far from clear is whether it will be a temporary shock, or something more prolonged.
Much will depend on the US economy . The Bush administration is trying to talk up the outlook , but the truth is that nobody can yet forecast the outlook for 2002 with any degree of confidence. Ireland, as a small open economy, is particularly vulnerable to any international downturn. Today, the Economic and Social Research Institute warns that the attacks on the US could lead to a sharp slowdown in economic growth next year, with Gross National Product rising by less than 2 per cent. The Central Bank, in its latest quarterly bulletin, has cut its 2002 growth forecast to 3.5 per cent.
For an economy where growth has averaged 8.4 per cent between 1995 and 2000, this is a very sharp slowdown. The ESRI warns that it could lead to a doubling of unemployment by 2003 and a 15 per cent fall in house prices next year. Even if the Central Bank's slightly more optimistic scenario proves correct, economic conditions will be much less buoyant.
The ESRI's medium-term review is not all gloom, however. The Institute insists that the economy can bounce back quickly and that medium-term prospects remain good. The Central Bank shares this view about the resilience of the Irish economy. However if the economy here is to recover from the coming downturn, it will first be necessary for the international economy to start to recover fairly quickly. Given the damage to confidence from the events of September 11th, such a rapid global upturn cannot be guaranteed.
What can the Government do to respond to the worsening outlook? There is little it can do to support the overall rate of economic growth - although it may choose to provide short-term support in some areas. Job losses are unfortunately inevitable and there will be much greater pressure on companies, and their employees, to work together to protect competitiveness.
The decisions the Government makes for the 2002 Budget will be important. The overall tone of the package must be prudent and determined to keep the public finances in strong shape. As the ESRI points out, a focus on securing value for money in public spending - both current spending and investment in infrastructure - will be essential, at a time when less money is available.
The Budget must also aim to boost competitiveness and contain inflationary pressures. It is not the kind of Budget which the coalition would have hoped to have delivered before a general election. However a sensible approach is essential, if the economy is to be positioned to benefit from an international upturn - whenever it arrives.