THE GLOBAL economy is beset by two difficulties - high inflation and low economic growth - which governments and central banks are badly placed to address. Realistically, neither has much scope to intervene to stimulate economic activity.
Among the advanced economies, budgetary constraints in the US and Europe mean their governments cannot raise spending or lower taxes. And, given worldwide inflationary pressures, central banks cannot, for now, cut interest rates to boost growth. Last week disappointing economic data from the US, Japan and Europe shocked financial markets. For the world's major economies, the data underlined the challenges posed by economic stagnation and rising inflation.
The US inflation rate reached 5.6 per cent in July, the highest in nearly two decades. The American economy hovers close to recession. But in Europe, the economic outlook is even gloomier. Inflation in the euro zone reached 4 per cent last month, twice the target rate set by European Central Bank (ECB). In the second quarter of 2008, economic growth declined in the 15 euro area countries, the first contraction since the euro was introduced in 1999. Europe is struggling to avoid recession - defined as two successive quarters of negative growth. And so too is Britain, as the governor of the Bank of England also acknowledged last week.
Low growth, high inflation and a credit squeeze in the world's advanced economies have left governments and central bankers with little room to manoeuvre. Almost every one of the Group of Seven is facing recession, which the US economy has managed, so far, to avoid. That success owes much to resolute action taken by the Federal Reserve, America's central bank, in cutting interest rates to counter the sub-prime mortgage crisis.
But it has come at a price in the shape of a declining dollar and rising inflation as oil, food and commodity prices soared. One consolation is the 20 per cent drop in the oil price in recent weeks, with commodity prices also weakening, and some indications that the dollar's long decline may be over, as the currency strengthens.
With so many dark clouds amassing, silver linings can be hard to detect. Nevertheless, there may be some grounds for qualified optimism. Certainly, the global economic slowdown has taken its toll as reflected in falling exports, rising unemployment and collapsing consumer confidence. But with oil at $113 a barrel and no longer at $150 and with commodity and food prices falling, global inflationary pressures should ease in the medium term, leaving households with more to spend.
The prospect of falling prices should help to check and reverse inflationary expectations and reduce the risk of a dangerous wage-price spiral developing, not least in Ireland. This prospect of lower inflation against the background of a global economic downturn gives the ECB scope to cut interest rates - probably early next year.
Ireland has one of the world's most open economies. As such, how the global economy performs matters greatly as it partly determines our economic future and our wider fate.