Although the Dow Jones index allied somewhat yesterday, the turmoil in the international money markets this week has caught investors off-guard and left economists mulling over the possible long-term implications. It may be that no definitive conclusions can be drawn; that the uncertainty of recent days amounts to little more than the customary ebb and flow of the financial markets. Some analysts believe that the decline in values represents no more than a `healthy correction' in the price of some overvalued stock and some profit-taking by investors.
Certainly, the suspicion lingers that this week's market turbulence may signal that share prices have peaked and that they are, at last, on a downward spiral. The scale of Monday's losses on Wall Street was quite remarkable; the Dow closed down 157.11 points, a slide that was the sixth-largest in history, at least in point terms. The decline in share values is clearly linked to fears that the Federal Reserve - which last month raised interest rates in order to dampen inflationary pressures - may increase rates again in the coming months in order to prevent the US economy from over-heating.
But the abrupt decline in shares - after one of the strongest periods of earnings growth for many US companies - may have a wider significance. It could signal a more general nervousness among investors about future prospects and a belief that the markets can no longer maintain their recent momentum.
Given the interlocking nature of the world economy, it was inevitable that the turbulence on Wall Street would have an impact in London and, indeed, on the Dublin Stock Exchange. The collateral damage, while not as bad as was feared, was still substantial; some £11 billion was wiped off shares in London, while the Dublin market lost an estimated £560 million.
Ireland's very close links with the US economy - underpinned by the heavy US inward investment in this State - makes our economy more vulnerable than other EU states to developments on Wall Street. The question now is whether the expected interest rate rise in the US will help to keep inflation in check or whether a further series of such increases are needed. A series of US economic indicators - including monthly wage and unemployment figures - will be closely monitored. Ironically, further evidence of strong growth in job creation could deepen concerns about inflation and create further upward pressure on interest rates.
That said, it may be that this week's turmoil may serve as a salutary reminder that the current robust good health of the Irish economy may not continue indefinitely; the internationalisation of economic affairs makes the Irish economy vulnerable to events in Wall Street, in Frankfurt and in London. The economic transformation of this State from the sick man of Europe to the Celtic Tiger has been remarkable; but we should not delude ourselves about the extent of our economic independence.